“Gradually and then suddenly,” is how Ernest Hemingway described bankruptcy in his 1926 novel, The Sun Also Rises. This is what often happens when people run out of money and options. At first money is moved from A to B as the wool is pulled over creditors’ eyes in a desperate effort to plug holes in the balance sheet. But creditors start to talk to each other and panic when they realise no money is left. All come for the debtor at the same time, hoping to salvage something. In double-quick time what was a slow-moving, excruciating process becomes a stampede. Insolvency comes quickly, resolutely and without exception.
Countries go bust in the same way.
Could France go bust? Europe’s second-largest economy is in a bind. The hapless figure of François Bayrou – France’s fourth prime minister in two years – has become a symbol of French political ineptitude, as he tries to convince the electorate that the country is heading for a fiscal crisis. His ideologically divided coalition partners have abandoned him. In parliament the centre-left Socialists have thrown their lot in with Marine Le Pen’s right-wingers, refusing to back any reduction in government spending.
The prime minister has resorted to playing the generational card, accusing France’s pampered Boomers of giving the bill for the welfare state to the younger generations. All the while president Emmanuel Macron, who sparked this latest bout of political instability a year ago by calling an inconclusive “snap” election, faces the prospect of another election or, even worse, a high-risk referendum. In the wings, Le Pen on the right, and the extreme left on the other side, consolidate their positions in the polls, each side calling for not just the prime minister’s head but the president’s too. France is becoming ungovernable, just at a time when it needs hard decisions.
Laughter and darkness as Trump escalates grievances at the United Nations
Maria Steen ‘hopeful’ she can still get on ballot paper for presidential election
Daniel Aruebose: Postmortem fails to establish cause of death
Big Mike’s restaurant in Blackrock to close due to ‘insurmountable’ industry challenges
The latest crisis has been sparked by Bayrou demanding that the government cut its spending by €44 billion this year. But even this, a drop in the ocean against the background of France’s overall deteriorating finances, is too much for voters. In polls, three out of four have vowed to “block everything”. But choices must be made because France is running out of money. This incredibly wealthy, sophisticated country made a decision to mortgage itself to foreigners, and now those mortgage rates are rising. Last week French long-term interest rates – the most accurate indicator of national risk – rose above those of Greece. Given that Greece defaulted on its debt 10 years ago, the deterioration of France’s balance sheet is truly remarkable.
The question haunting the corridors of the EU and the ECB is: could France be a big Greece at the heart of Europe? Whisper this nervously, because the implications for the EU are enormous. To answer that question, let’s look at the numbers.
France is the world’s seventh-largest economy, fourth-largest government debt market and fifth-largest banking system. It’s huge. With an external debt of $7.7 trillion (248 per cent of GDP) and a total debt-to-GDP of 319 per cent, France has the second-highest debt among developed world economies after Japan (394 per cent of GDP). The difference is that Japan is self-financed – Japanese citizens own Japanese national debt. France, in contrast, has pimped itself out to the world. Today 54 per cent of all French government debt is owned by foreigners, who are growing impatient with the adolescent theatrics of the French political class. The electorate appear to be in denial, opting in polls for the extreme right and left, both committed to more government protection and spending. Behold the politics of default.
Historically when a big country has found itself in a debt corner similar to France’s today, it has printed money; generated inflation, which reduces the cost of the debt; and the debtor (the government) climbs out of the cul-de-sac by robbing the creditors (holders of the debt) via inflation. France cannot do this because it is in the euro zone, and thus uses a currency it can’t print. This is both the benefit and the cost of the euro. In good times, countries get lower interest rates, but in bad times the same countries can’t print money to escape high debt. Ireland experienced this straitjacket after the 2008 crash. The response was austerity. But the French electorate will not countenance austerity. So what gives?
Up to now foreigners have been happy to buy French debt because the assumption has been that the ECB will do what it did in Ireland and Greece, which is to be the “buyer of last resort” in any fiscal crisis. But France is not Ireland or Greece; it is far bigger. Is it too big to save? That’s a question for the ECB.
[ The Irish Times view on politics in France: stuck in a bindOpens in new window ]
Technically the ECB can do what it wants. The magic of central banking is that money actually doesn’t matter. I know this sounds counterintuitive; surely for the central bank, only money matters? Well, yes and no. Money matters for central bankers in the sense that their job is to maintain the rate of inflation at a certain level, but money doesn’t matter in the sense that the ECB can buy what it likes with no budget constraint. In essence the ECB can buy all France’s debt if its wants.
The issue is whether the ECB wants to or might choose to bail out France indefinitely. At the moment France is an integral part of the EU, so buying the bonds of France and Macron’s administration is part of a broader policy of European integration. When a friend is in trouble the EU will give it a hand. But what happens if France goes rogue under a separatist regime such as a Le Pen administration? It’s far from impossible that, if France’s political infighting continues, Le Pen will eventually succeed in her quest to be president. Will a right-wing, devolutionist, anti-European president pit herself against the EU and its bank, the ECB?
It is far from certain in such circumstances that the deeply federalist ECB would want to continue to backstop a Le Pen government committed to undermining EU power. If a cleavage were to occur between Paris and Frankfurt, the assumption that the ECB would act as buyer of last resort could disappear and all official support underneath the French bond market could evaporate. Then the road to default would open up.
None of this is baked in just yet, but the prospect of a financial crisis at the heart of Europe, one that will be welcomed by both a virulent anti-EU White House and an endemic anti-European Moscow, has to be central in the years ahead.
