AMBROSE EVANS PRITCHARD TO FRANCE’S HOLLANDE….” DON’T CRY FOR ME FRANCOIS’
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100021082/dont-cry-for-me-francois/
Ambrose Evans-Pritchard has covered world politics and economics for 30 years, based in Europe, the US, and Latin America. He joined the Telegraph in 1991, serving as Washington correspondent and later Europe correspondent in Brussels. He is now International Business Editor in London.
French leader François Hollande is uncomfortably close to a collapse in credibility. His poll rating has sunk to 36pc. The speed of decline has been shocking.
The latest broadside comes from ex-German chancellor Gerhard Schröder, supposedly his ally on the Left.
“The election promises of the French president are going to shatter on the walls of economic reality,” he said in Paris.
The backsliding in the retirement age is indefensible and “cannot be financed”. Two or three more blunders of this kind and “reality will catch up with out French friends”.
Mr Schröder knows what it takes to claw back competitiveness. He lost his chancellorship on the Hartz IV labour reforms.
This tale of political sacrifice can be exaggerated of course. The Hartz IV reforms are not the chief reason why Germany is super-competitive today within EMU. The country’s hiring and firing laws are among the least reformed in the OECD to this day.
The Teutonic machine regained a labour edge by screwing down wages for year after year (as companies like VW threatened to relocate plant to Eastern Europe). It was an internal devaluation. Hartz IV was the icing on the cake.
Be that as it may, there is no doubt that Berlin is seriously worried about the strategic direction of France. Le Figaro – which now seems to launch daily attacks of considerable ferocity against the hapless Hollande – had a two-page spread today on German disgust with the new sick man of Europe.
The French are living in Alice and Wonderland. Bild Zeitung asked whether France is becoming the “new Greece”. You get the drift.
The business lobby Medef warned two weeks ago that the country is heading into a “hurricane”. It said Hollande is making a disastrous mistake by slapping on extra business taxes and pushing the top rate of capital gains tax to 62pc. (compared to 21pc in Spain, 26pc in Germany and 28pc in Britain).
Medef’s Laurence Parisot had some strong words, as I reported then. “The situation is very serious. Some business leaders are in a state of quasi-panic. The pace of bankruptcies has accelerated over the summer. We are seeing a general loss of confidence by investors. Large foreign investors are shunning France altogether. It’s becoming really dramatic.”
She said Hollande has yet to understand the “extreme gravity” of the crisis. Or rather, he has misunderstood it. He has embraced austerity but not reform, the worst possible mix.
The government will tighten fiscal policy by 2pc of GDP next year, with two-thirds coming from higher taxes. This ignores the lessons of reform around the world over the last half century that tax rises to do more damage in a slump than spending cuts.
The French state is gobbling up 55pc of GDP, similar to Sweden and Demark but without their free market system. Nothing is being done to tackle this.
The word you hear again and again these days in the City is that France is on borrowed time. Nobody knows when that shoe will drop, but the economy will almost certainly crash into recession over the winter, if it has not already. It will then remain stuck in perma-slump, much like Italy. The housing bubble will deflate a lot further (unlike Italy, which never had a housing bubble)
And remember, France no longer has its own currency and sovereign monetary control levers. It is at the mercy of others.
Here is a nice chart from JP Morgan, courtesy of ZeroHedge:
As of today, 10-year Italian bond yields are 262 basis points over French yields. Why?
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