France may be next to go in Crisis as the Weight of the Crushing Costs of her Social Democracy threatens the Euro
Week in Review
France is in big trouble. Or is about to be. For they have put the ‘social’ in social democracy. And the French people are about to learn how all that government largess can kill an economy. And take with it all the social benefits they’ve come to enjoy (see A country in denial posed 3/31/2012 on The Economist).
France has not balanced its books since 1974. Public debt stands at 90% of GDP and rising. Public spending, at 56% of GDP, gobbles up a bigger chunk of output than in any other euro-zone country—more even than in Sweden. The banks are undercapitalised. Unemployment is higher than at any time since the late 1990s and has not fallen below 7% in nearly 30 years, creating chronic joblessness in the crime-ridden banlieues that ring France’s big cities. Exports are stagnating while they roar ahead in Germany. France now has the euro zone’s largest current-account deficit in nominal terms. Perhaps France could live on credit before the financial crisis, when borrowing was easy. Not any more. Indeed, a sluggish and unreformed France might even find itself at the centre of the next euro crisis.
It is not unusual for politicians to avoid some ugly truths during elections; but it is unusual, in recent times in Europe, to ignore them as completely as French politicians are doing. In Britain, Ireland, Portugal and Spain voters have plumped for parties that promised painful realism. Part of the problem is that French voters are notorious for their belief in the state’s benevolence and the market’s heartless cruelty. Almost uniquely among developed countries, French voters tend to see globalisation as a blind threat rather than a source of prosperity. With the far left and the far right preaching protectionism, any candidate will feel he must shore up his base.
In America they say no president can win a reelection with unemployment at 8%. The French have been 1% below that rate for 30 years. Their banking system is not that far away from cascading bank runs. Their big cities are surrounded by tinderboxes of unemployed youth just waiting for something to set them off. And a large current account deficit means they are uncompetitive in international trade. Which means that their economy is not about to create a lot of new jobs to employ the unemployed. And with the government already spending over half of their GDP they’re not going to be able to throw much at the unemployed youth to keep them from expressing their discontent at being unemployed. And with France’s history of generous state benefits the unemployed will not take kindly to any austerity programs. Nor will those who have jobs.
Could France be the country to break the Euro’s back? Perhaps. For they are definitely too big for Germany to save. And if France goes the grand experiment of the common currency will come to an end. For a common currency without a political unity is doomed to fail. For there is no way to stop a member state from not meeting the requirements of the Maastricht Treaty (which created the Euro). So their financial problems are everyone’s financial problems. Because of the common currency. And if you think the French are going to take austerity orders from Germany you don’t know the French. Or Franco-German history. For they will cooperate. But one will never subordinate themselves to the other.
So don’t be surprised if the next round of austerity fills the streets of French cities and towns with discontent. For it looks like it will soon be their turn in this unfolding saga of the decline and fall of the Euro. Pity to see this befall such a great people. For much of the Enlightenment came from French thinkers. And to see her collapse under the weight of her social democracy is painful to watch indeed.
Tags: austerity, benefits, common currency, current account deficit, deficit, economy, Euro, France, French, generous state benefits, Germany, international trade, jobs, social democracy, unemployed youth, unemployment