Thursday , 24 August 2017


D-Day is Coming: A Financial Crisis is Brewing in France – Here's Why

“The real risk for the euro zone now is not Greece, but France,” says a top French finance boss. Nicolas Baverez, a commentator who foresaw the country’s looming debt problems in a bestselling book of 2003, agrees: “I’m convinced that France will be the centre of the next shock in the euro zone.” [below their views are substantiated with some alarming and disturbing facts about France;s financial situation and how their politicians are failing to address the brewing crisis.] Words: 740

So reports an article* in the Economist (www.economist.com) which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

The article goes on to say, in part:

“The awkward truth is that France, the second-biggest economy in the euro zone after Germany, faces a public-finance squeeze. French public spending now accounts for 56% of GDP (see chart 1 below), compared with an OECD average of 43.3%: higher even than in Sweden. For years France has offered its people a Swedish-style social model of services, benefits and protection, but has failed to create enough wealth to pay for it.

Today France continues to behave as if it enjoyed Sweden’s or Germany’s public finances, when in truth they are closer to those of Spain.

Although France and Germany have comparable public-debt levels, at over 80% of GDP, Germany’s is now inching downwards whereas France’s is at 90% and rising…. The country’s auditor…has warned that unless “difficult decisions” are taken this year and next on spending, public debt could reach 100% by 2015 or 2016.

 

The underlying problem is that, over the past ten years, France has lost competitiveness.

  • In 2000 hourly labour costs in France were 8% lower than those in Germany, its main trading partner; today, they are 10% higher (see chart 2 above).
  • French exports have stagnated while Germany’s have boomed.
  • An employer today pays twice as much in social charges in France as he does in Germany.
  • France’s unemployment rate is 10% next to 5.8% in Germany—and has not dipped below 7% for nearly 30 years.

This erosion of French competitiveness raises hard questions about the underlying social compact. Frenchmen cherish the notion that everyone has an equal right to decent services in good times and a generous safety net in bad but:

  • what sort of level of support, in sickness, joblessness, infancy or old age, can France really afford to offer its citizens?
  • How can the country justify its massive public administration—a millefeuille [multi-layer] of communes, departments, regions and the central state—which employs 90 civil servants per 1,000 population, compared with 50 in Germany?
  • How can France lighten the tax burden, including payroll social charges, so as to encourage entrepreneurship and job creation?

Put simply, France is about to face the tough choices that Gerhard Schröder, Germany’s former chancellor, confronted in the early 2000s or that Sweden did in the mid-1990s, when its own unsustainable social system collapsed. The euro-zone crisis, which has made bond markets unsparing of slack economic management, means that these decisions have become both more urgent and more difficult.

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Whoever is elected…[in] France’s…presidential election…will face a choice.

  • If he fails to be tough enough on the deficit, markets will react badly, and France could find itself at the centre of a new euro-zone financing crisis.
  • If he tackles the deficit with tax increases across the board and even spending cuts, voters will not be remotely prepared for it.

The candidates, however, are masterfully managing to duck all this….Although both Nicolas Sarkozy, the Gaullist incumbent, and François Hollande, his Socialist rival, have embraced deficit reduction, each vowing to bring France’s budget deficit down to 3% of GDP next year, neither is promising to do so by making radical spending cuts. Both presidential front-runners instead rely heavily on balancing the books through tax increases.

Mr Sarkozy has already raised corporate and income tax and now says he wants to:

  • tax even those who leave France for tax reasons.

Mr Hollande wants to:

  • increase the top income-tax rate to 75% on those earning over €1m ($1.3m) a year, which means they would pay over 90% after social charges,
  • increase the annual wealth tax, levied annually on assets worth over €1.3m, and tax dividends more,
  • raise the minimum wage,
  • create 60,000 teaching jobs,
  • lower the minimum retirement age to 60 for those who began work young, and
  • “renegotiate” the European fiscal compact, a hard-won deal that seeks to guarantee budgetary discipline.

Conclusion

How can France be holding an election that so signally fails to confront the right questions? What are the chances that any of the candidates, if elected, is ready to face up to the shock that is to come?”

*http://www.economist.com/node/21551461  (To access the articles please copy the URL and paste it into your browser.)

Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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