France Versus Reality

By Delusional Economics, who is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

Yesterday I noticed an interesting paragraph over at efxnews about France and its parallels with what many see in the market today:

It’s a big surprise for some that France is high on the crisis susceptibility index because if you look at the market, their spreads are very narrow as the market treats France as another Germany. But when you look at the facts, at the background data, they actually occupy an above average position of almost every single variable. They have an account deficit which is in the upper half of these sample of countries. They have a government budget deficit, along with their debt to GDP ratio which is just above average. So, if you are looking to buy French Government bonds, you are probably alright because the market is treating France as the Siamese twin of Germany. But if you look to it from an economic point of view, then you should be very deeply worried because the fundamentals are not right.

That quote was from Thomas Mayer, senior adviser at Deutsche Bank, and it is quite interesting to think about in terms of what I have been discussing over the last 3 years. As I’ve spoken about many times previously, France has an economy much like that of periphery Europe , that is based on an internal services economy reliant on foreign capital to maintain internal balances. Given this, a cut in government sector expenditure will most likely have a negative impact on private sector demand leading to higher unemployment and lower industrial production. Obviously none of this is new, I mentioned this exact predicament back in June 2011:

High levels of public and private debt, a long running negative trade balance and current account deficit, stalling industrial production, GDP and employment along with significant banking sector exposure to the periphery all add up to a fairly risky predicament. This is certainly not a country that could take on a strict austerity regime without causing itself some significant short-to-medium term economic damage because it is obvious from the metrics that the private sector has been borrowing from both the external and government sectors for a long period of time.

And as we know now, 18 months later, that’s all coming home to roost:

The number of unemployed people in France climbed to new record levels in March, according to official data.

Around 3.2 million people were out of work in the country, an 11.5 percent annual increase, the labour ministry said on Thursday. With a wave of industrial layoffs taking effect, the March jobless figure beat the previous all-time record of 3.1 million set in January. 1997.

The new figures are a symbolic blow to President Francois Hollande, whose approval ratings have sunk to the lowest of any modern French leader in recent months as jobless claims soared. Battling to make good on his promise to reverse the rise in unemployment by the end of this year, Hollande has launched subsidised youth-job schemes and pushed through a reform to make hiring and firing slightly easier.

On Thursday Hollande reaffirmed his goal to reverse the rising trend, calling on his government to combine with industry and other players to use all means possible to create jobs.

So the macro-data was rubbish and I was right to point out that austerity was most likely going to punish France, as it probably will The Netherlands. So what you may ask? As long as the ECB is there to provide the ‘last resort’ backstop then all is well. Well yes… and no, and certainly NO in the context of the latest action from the Bundesbank.

My own opinion is that this is fundamentally important and a somewhat overlooked fact of what we see in the EZ. France is an economic microcosm to understand why the ECB’s programs of OMT and LTRO can’t actually solve anything with the Eurozone. As I talked about back last September the ECB offers liquidity to the banking system via asset swaps, but if there is no private sector demand for credit, due to private sector retrenchment, then this will do bugger all to help the economies of periphery Europe. As I said then:

So QE and OMT are monetary programs that, in part, aim at increasing the leverage of the private sector, but they have only attempted to address the supply side of the equation. Fiscal policy in the EZ is continuing to lower the private sector wealth and by doing so is reducing the demand for credit which in turn is further weakening the economy. This dynamic appears to be more that offsetting the expansionary monetary program which is why you have seen the ECB’s response continue to become larger and larger over time. The Eurozone is therefore likely to continue to see poor economic outcomes even under the open-ended OMT because the insistence on the fiscal compact as a pre-cursor to renewed intervention is likely to be completely counter-productive.

So although it’s not implicit in Mr Mayers’ statements that is exactly what we continue to see in the Eurozone, and I see very little good news on the horizon for either France or The Netherlands under the current policy framework.

Interestingly Italy’s new government may have some leverage on Brussels and Berlin to offset these inevitable outcomes, but obviously I’m not holding my breath on that one.

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  1. Daniel de Paris

    “reliant on foreign capital to maintain internal balance”?

    “private debt”?

    That needs to be substantiated a bit more. FWith numbers.

    Of course, France is a bad situation.

    From a macro-perspective, both in terms of savings structure and private debt, let alone external deficits of various nature, its global situation is IHMO still better than US and, foremost, the UK.

    I just need to cross a short Channel for a check.

    Since we all know that Germany will hesitate a rough treatment against France, with some reason, good or bad, it still has time. And IHMO much more than what this post is implying, ie a trading opportunity.

    Please have an other try on the OAT, Sir!

    Do not get me wrong, I am very disappointed that France is not in a corner JUST NOW.

    In the way the South of Europe is. That would trigger the sane reactions that is needed. The earlier the better in those matters, whatever Krugman and al do “like to believe”.

  2. masaccio

    The problem in France, as elsewhere, is magnified by the consolidation of cash in the hands of the oligarchs. This is the problem around the globe. Look at the US, where the wealth of the few billionaires and centi-millionaires dwarfs the wealth of the remaining 99.9% of citizens.

    The solution, as I see it, is to increase the taxes on wealth of the rich and redistribute it to the rest of the country through building projects and outright cash payments and/or debt forgiveness. The rich, or some new group of the rich, will collect it soon enough.

    The rich will revolt, you say, and move themselves and their money abroad. That can be handled either by confiscatory taxes on people who move out, which is not good, or better, when all countries agree that the problem should be solved by heavy taxation of capital and straightforward redistribution.

    I note that the French found a way to accomplish this in the late 18th Century. Now the French people own the Luxembourg Gardens, the Tuileries, and the Louvre, among many beautiful things.

    1. from Mexico

      One thing is for sure, and that is that the private financial sector has become so corrupted and dysfunctional that it can no longer prudently or efficiently allocate capital.

      In Argentina, where the backlash against neoliberalism is far more advanced than in Europe, the government is expropriating malinvested capital from its owners and giving it to the workers to see if they can do a better job managing it. Private property rights, which are sacrosanct under neoliberal regimes, are being abrogated in favor of enhanced industrial production. This process is described in some detail in Naoimi Klein’s film The Take:

      1. gepay

        The allocation of the surplus capital of the real economy to those who can put it to its best use is theoretically what finance (mostly Wall Street in the US) is supposed to do. So the cost of Wall Street is what might be viewed as a transaction cost. However these days (did it ever really function as above?) it is mainly a casino using ever more risky ways to gamble the surplus or skim it.

    2. andrew hartman

      hasn’t the left already tried confiscation and redistribution? how did it work

      1. from Mexico

        If we look at the grand sweep of the 20th century, including the New Deal and the socialist governments of Europe, pretty damned well.

        1. andrew hartman

          well gee…..i was thinking of the soviet union, china, eastern europe, north
          korea, and so forth. aren’t you being a bit selective?

          1. from Mexico

            Like all good right-wing and left-wing authoritarians, you conflate the type of political system with the type of economic system.

            There is, after all, a rather large difference in most people’s eyes between a socialist dictatorship (such as your list) and a socialist democracy (such as New Deal America or the socialist democracies of Europe).

            State capitalism has much more in common with state socialism than it does with democratic socialism. Tyranny is tyranny, regardless of whether it wears a capitalist hat or a socialist hat.

          2. Massinissa

            Nice straw man dude.

            I dont know of many capitalists that yearn for the days of Hitler, even though Hitler had a type of hyper-capitalism that the 1% absolutely fawned over (Ford sure loved it!). So stop pretending all of us leftists want to live in the soviet union or whatever, its sort of obnoxious.

          3. PSA

            The USSR was an ugly beast in any case; not much to do with socialism. War measures were imposed and never removed, a band of political oligarch made all the call, including some stupendously dumb ones, and little attention was spent on the well-being of the population.

            Socialism does not mean workers being anonymized and dehumanized into goalless drones deprived of initiative. Sadly, in all the countries listed, this was the case.

            However socialism works exceptionally well in small groups with common goal. Religious orders such as Jesuits come to mind. Small, homogenous countries also fare better. Waste and duplications are kept at a minimum and efficiency in resource allocation smooths things up.

            Socialism isn’t an inherently bad social system, but we’ve yet to figure out how to scale it up without friction slowing everything to a crawl, and with some safeguard against misallocation of limited capital or power mongering.

      2. Alejandro

        By “left” do you mean –what’s “left” after the bulk of your paycheck is used to fuel the flames of F.I.R.E.? Assuming you still have a J.O.B. (just over broke).
        By “confiscation” are you referring to the ongoing foreclosure crisis or the “privatization” (redistribution?) of public infrastructure?
        By “redistribution” do you mean our illustrious “Q.E.” programs, which have “efficiently” facilitated the private grab-a-thon with public debt? Or are you referring to the insidious, corporate coup d’état?

        “how did it work out?” It depends on who you ask!

    3. Max Laue

      “I note that the French found a way to accomplish this in the late 18th Century. Now the French people own the Luxembourg Gardens, the Tuileries, and the Louvre, among many beautiful things.”

      Today’s monetary nobility is findamentally different from the nobility of the 18th century. Wealth was mainly tied to land and titles back then. There wealth was barely mobile. You can’t pack up the Tuileries and move it to the Caymans.

      Today, the super-rich are a class of cosmopolitan transnationals. If they don’t like it in France, they leave for greener pastures. Their wealth is save in Luxembourg, Switzerland and the Caymans.

      1. Synopticist

        Their wealth is mainly in property, and in firms who are based and trade in France.

        They can no more take that with them than could the C18th aristocrats.

      2. from Mexico

        I’d like to see the super-rich class of cosmopolitan transnationals try to convert their paper wealth to something visible, tangible and palpable without the aid of the strong arm of the governments they now control.

        Solve the crisis of democracy, and the economic crisis will take care of itself.

        1. Kurt Sperry

          Indeed. Picture the global transnational ultrawealthy trying to find real assets for their tens of trillions of dollars to invest in within the little tax haven states! A cup of coffee would cost a million dollars in them, a modest house, a billion probably. I can hardly think of a more just outcome.

      3. Another Gordon

        I would love to see the 0.01% scrambling to convert their paper wealth into equivalently valued real assets actually sited in the Cayman Islands and other tax havens. It would be the ultimate game of high-stakes musical chairs. However, I’m not holding my breath.

        It’s interesting how the role of limited liability has shifted over time to become a key enabler of looting.

        When first introduced it was to enable investors to pool their funds on expensive high risk ventures that could bankrupt any one of them if they didn’t work out – trading ships to the Far East (when that was several months’ sailing through largely uncharted waters) or metal mining in Cornwall (long before modern geology or exploratory drilling reduced the risks).

        That purpose still continues to some extent but limited liability has more often become just a device to hide ownership and conceal fraud – uses which are emphatically not in the public interest.

        Ownership should be transparent with assets forfeit where it’s not disclosed.

    4. Valissa

      François Hollande to woo French business with tax cut
      President François Hollande plans to slash capital gains taxes to try to convince investors that France is open for business and repair relations after protests against his policies last year. …

      “The big picture is to give a strong sign that France is a good place to invest and that we are business friendly,” said Fleur Pellerin, minister in charge of small business and the digital economy.

      The government denies there has been a tax exodus, saying the departure of actor Gérard Depardieu this year was not typical. But it has acknowledged that a big increase in capital gains taxes on business investors was a mistake.

      Looks like the oligarchs are winning this one. This is quite a turn-about (flip-flop) for Hollande.

      1. Massinissa

        I dont even understand why Hollande bothered running for president just to continue all of Sarkozy’s policies. Would have made more sense to let Sarkozy do Sarkozy’s policies.

        Hollande is basically a french Obama. Im not convinced Hollande isnt doing exactly what he wants to be doing.

        1. Valissa

          There is a reason that there are so many quotes about politicians like these…

          Idealism is the noble toga that political gentlemen drape over their will to power. — Aldous Huxley

          A professional politician is a professionally dishonorable man. In order to get anywhere near high office he has to make so many compromises and submit to so many humiliations that he becomes indistinguishable from a streetwalker.
          Henry Louis Mencken

          The word ‘politics’ is derived from the word ‘poly’, meaning ‘many’, and the word ‘ticks’, meaning ‘blood sucking parasites’.
          Larry Hardiman

        2. Kurt Sperry

          French Obama is an apt descriptor for Hollande–a man who sells himself as a progressive antidote to a corrupt status quo but once safely in office betrays every principle he espoused to become elected. Another Trojan Horse to co-opt the left. The French left is as profoundly stupid as the American one.

    5. Dave of Maryland

      In 1960 came the New Franc, with a value of 100 old francs. Which had been made of aluminum and were promptly hammered into park benches which had conveniently-sized round holes in them, presumably by citizens happy to be rid of them.

      A new currency, given in equal amounts to all citizens regardless of standing, would solve many problems.

  3. The Dork of Cork.

    All of the French transport planning that I can see is that they are planning for a devaluation although devaluation against what I am not so sure.

    As long as other PIig like countries stay within the Euro the French banks can extract real capital from these jurisdictions.
    Therefore there is no reason to leave just yet.
    Where is the capital going ?
    The French rail programme is bigger then the 1970s & 80s Nuclear programme.
    Why are they investing so much into this when there is so much overcapacity in the present system ?

    The answer is obvious.

    They are preparing for a rise of wages relative to GDP.
    A rise in domestic demand.

    1. Andrea

      The French grasp that their expenditure on FF (fossil fuels) for transport is way too high, meaning individual cars and truck transport, which is, btw, HUGE in France.

      France has always prided itself for its energy policy, ie. nuclear electricity which was, is, ‘cheap’ and provides a huge punch. With the Greens contesting nukes, and everyone being, at least in public or on paper, for public transport, investment in it proceeds rapidly.

      The Cos. that furnish it lap it up. Not in itself nefarious… Yet an analysis of territorial organization, commuting, transport routes, etc. is lacking, afaik. The basic idea is that growth is perpetual but cheaper ways of moving ppl and goods around is needed. The car industry is not happy….

      So yes, they are looking to a future with more growth, more cash in hand, more spending, more movement, just in a more communal way. Eliminating the private car is of course not a bad idea.

  4. Andrea

    F. Hollande is a Socialist like Obama is a Democrat.

    Hollande cannot propose any ‘new model’ of society, he is part of the mainstream, in sway to Corps, Banks, the so called Market (interest rates) plus the need to keep ties with Germany, and the EZ together, etc.

    Increasing / protecting employment is a national priority, but employment can only come from entrepreneurs, only ‘growth’ can save France, is the mantra. Therefore, he is pursuing neo-liberal policies openly or *sub rosa.* (None will have any result whatsoever, neither short or long term.)

    The upshot is that the Right is attacking him (UMP, sore losers and tribal hate, Sarkozy the first is King), his left base has shrunk, doubting, unhappy, and his Gvmt. is rife, even exploding, with quarrels, as some of them believed in a new world and his electoral promises and just can’t understand why he reneges.

    Austerity policies are detrimental, sure. See Nobel Prize Winner Paul K, favored columnist at the NYT. Throwing money at problems or irrigating with printing doesn’t work too well either. These doctrinaire positions emanating from junk Science and their opposition don’t help anyone. They divert attention.

  5. Gerald Muller

    I am afraid most comments are way off because it is almost impossible for an American who has not lived many years in France to grasp to what level of marxist-socialist brain washing the French have been subjected to for the last 40 years. Hollande is a real socialist, of the XIXth century brand, the worst kind. One decision that his government has made is that capital should be taxed exactly as wages. Have you ever heard of such nonsense?
    Furthermore, the number of functionaries in France is 1.5 million more than Germany (costing approx. 80 billion euros a year). It is wrong to say that it is essentially the oligarchs who have taken over France (although true to some extent), it is the civil servants. One single example: the prime Minister, Mr. Ayrault will have a yearly pension of approximately EUR180000 (the sum of three cumulative pensions). Please calculate the capital one would need to have such a pension for -says- 20 years plus half of that to his (usually younger) widow for ten years more. All that paid by French taxpayers. Finally, note that Hollande has never worked in private industry. His whole present wealth has been paid by taxpayers.
    The margins of French industry are the lowest of Europe, laminated by excessive taxes. My hunch is that it will not be very long before foreign buyers of French obligations realize that the country is bankrupt. What will happen after this is anybody’s guess, due to what is mentioned in the first sentence of this post.

    1. jrs

      “One decision that his government has made is that capital should be taxed exactly as wages. Have you ever heard of such nonsense?”

      Oh my you don’t say. *faints*

    2. Massinissa

      “One decision that his government has made is that capital should be taxed exactly as wages. Have you ever heard of such nonsense?”

      How DARE that monster tax the god loving capitalists more than the labour of the filthy proletariat?!!

      (snark off)

      1. Gerald Muller

        I thought this blog was an economist one, not a pure communist one. Capital is always at risk and taxing it like wages which is far less at risk result in nobody willing to invest in France anymore. In fact more French entrepreneurs have left for foreign lands in this last year than ever before. The collapse of the country is near at hand and the ones who will suffer most are your dear proletariat.

    3. Andrea

      @Gerald. I agree that functionaries in F are far more numerous that in D. Plus, that they are, like almost one man, Socialist voters. (De Gaulle nationalized a lot but finally left out small biz. and agriculture, who in return vote UMP like one man.) However the big-state vs. small-state argument is empty, foolish, doctrinaire. One society may choose to have high contributions to pay docs, teachers, infrastructure, etc. (see Scandinavia for ex.), another may choose to keep these low and even things out by other means. Your favorite private worker (e.g. nurse) may work for a big Corp or Hosp. Conglomerate, but will be paid a salary that has been negotiated by her Union or equivalent, arbitrated, often, by the Gvmt. (Such as in Germany or Switzerland.) Anyway this is a dead thread…

  6. The Dork of Cork.

    Both the Uk & France is socialist in their own different & unique ways.

    They have got free goods from the Euro Soviet for so long now.

    When you get free net goods you must spend it…….

  7. Hugh

    France’s fundamentals have been trending negative for some time. As some of us pointed out at the time, there was a lot less to Hollande than met the eye. As for the problems in France and the Netherlands, they are both examples of the rotting inward from the periphery to the core, again which we predicted.

    Europe is a kleptocracy. The euro is a major tool of the kleptocrats. It keeps countries within a framework where they can be more efficiently looted. If Hollande had been serious, he would have had to confront not just Germany but the whole structure created by the euro. He didn’t do this, and he didn’t because France, like Europe generally or the US, has completely corrupt political classes.

    So we have these massive problems and political elites dedicated to not solving them, indeed to further exploiting them. Can any of us then be surprised that these problems aren’t being solved and are getting worse?

    1. p78

      But… I recall seeing a graph of wages evolution in time in the EU, and the French curve was correctly rising exactly as the mean of the eurozone, while the German wages were declining below the mean of EZ. So I can’t agree with the comments here about French étatisme, when in fact they played by the rules towards their working class, while the Germans did not.

      1. Gerald Muller

        You forget that, if the French wages did not decrease, on the other hand unemployment has increased proportionally. In Germany, wages have stagnated for ten years (that is decreased in real terms) resulting in a booming German industry and an unemployment 5% less than in France. Furthermore German debt is decreasing now, while French one is increasing, rapidly.
        Pick your choice.

        1. p78

          LOL! Which means that Germans are screwed doubly, they are underpaid, overworked and also made to abide by the menace of unemployment.
          The unemployment in France rose only after the financial crisis, but not before, when their salaries were indexed with Eurozone inflation; German wages were stolen by the patronat for 10 years and nobody in the country of Marx and Engels said a thing to this humiliation, while undermining everybody else in the EZ.

  8. Orlando Aquileres

    What I know: The calculation used to determine France’s unemployment rate differs significantly from the US, Canada and the UK.

    What I don’t know: What the current differences in the calculations, especially those in “career (re-)training” schemes and other unpaid “internship” programs in France, simply because I last took interest in the subject over a decade ago.

    Any of the brighter minds on NC have immediate links to the definitions of unemployment rates and the calculations used by the French bureaucracy?


  9. cb

    Dork of Cork, where are you getting your info on French expenditures? How can I contact you directly?

  10. greg

    This old NC entry sums up the situation:

    And meanwhile, the German worker gets screwed and blames the Greeks. And soon enough the French.

    Running a trade deficit is destructive to your economy. See:
    The revenue of the industry in the country with deficit is eroded. With the continued erosion of revenue, industries are increasingly idled, and unemployment increases. The deficit country is forced into a deflationary spiral.
    See also: The adverse effects are mostly to the poor and labor, while the wealthy in the deficit country often end up better off.

  11. Ramon

    The problem with France is that during the last three decades, they did everything possible to demonize the entrepreneurs. Anything private was corrupted and evil.

    The results of this policy is obvious. French entrepreneurship is alive and doing well…the problem is that French entrepreneurs are moving to California, London, Geneva and now Dubai.

    I agree that the world need better controls, but overtaxing the middle class is not the way.

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