France starts to show the early symptoms of the Greek disease
I wouldn’t say that France has caught a full-fledged cold yet from neighboring Italy. But it is developing sniffles.
The problem is one that we should be familiar with from Greece and Italy. No sooner does a government—in this case that of President Nicolas Sarkozy—put an austerity package in place in order to reduce the budget deficit than falling economic growth blows a hole in that budget and creates the need for another austerity package.
Today it’s the European Commission that has issued a new and lower projection for economic growth in 2012. France will grow by just 0.6% in 2012—and that’s before taking into account the new austerity package recently proposed by Sarkozy.
Sarkozy proposed a new package, aimed to reduce the budget deficit by 6 billion to 8 billion euros ($8 to $11 billion), after his government reduced its forecast for French economic growth to 1% in October. The government’s earlier forecast had called for 1.75% growth in 2012. The goal is to produce a balanced budget by 2016.
You can see the problem, right?
Yields on French government 10-year bonds have a long way to go before they hit Italy territory near or above 7%. But they sure moved in the wrong direction today. The yield on the 10-year French bond climbed 0.2 percentage points to 3.4% at the close in London trading. The spread between the yield on the French 10-year bond and the benchmark German 10-year bond rose 0.18 percentage points to 1.66 percentage points. That’s the widest spread since the beginning of the euro in 1999. (For comparison, the 10-year Treasury from the AA-rated United States yields 2.07%.)
The European Commission predicts that France’s debt burden will climb to almost 92% percent of GDP in 2013. This morning Standard & Poor’s reaffirmed its AAA rating for France with a stable outlook. And the French government extended a ban on short-selling 10 French financial stocks for another three months.
There’s clearly still a lot that needs to get sorted out.
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This is the perfect storm for all us countries mired in debt, ie weak economies, budget constraints, increased demands for services and stimuli while recognizing the rating agency oversight and market demand for increased yields when meaningful budget reductions aren’t effected.
I won’t be surprised a bit when Congress muddles their attempt to appease rating agencies later this month.
Gorm
Jim, isn’t this pretty much the way it is with any over-indebted entity? It’s not that it’s hopeless to balance the budget, it’s just that they’re going to take some time to converge on the right amount of spending to hit the target. That is, a $100B drop in government spending results in less than a $100B drop in government receipts. That they can’t hit it on their first try is natural for them because they want to cause the least pain possible to their citizens more than they want to overshoot the budget target and make sure they get the problem solved.
One way or another, austerity is coming, austerity to the point that the budget gets balanced. Whether that happens voluntarily budget cuts or involuntarily through a credit cutoff after a bankruptcy, it’s going to happen.
I think we do a disservice to the conversation when we don’t recognize this fact and instead, focus on the failure of the first few budget cut iterations to hit the mark.
ktcat, you’re focusing on a very narrow definition of indebtedness and ignoring the possibility that an indebted country could draw upon the wealth of its citizens. I find all the talk about Italy being bankrupt, for example, rather amazing when private wealth in Italy is estimated at 5 to 10 times the government debt. Now I’m sure wealthy Italians would prefer to hang onto their wealth but that doesn’t mean the country is broke–just that wealthy Italians would prefer to hold onto their wealth. It will be a political decision by all Italians whether to tap into that wealth or to go through austerity and lower growth. Of course, you can say that it’s unfair for Italy to tap private wealth for public purposes (although that is, if I remember, how taxes work) but that does ignore the role of governments in the 20th and 21st century in creating wealth for specific individuals and sectors. That is one of the reasons that so many people object to Berlusconi’s rule–that he has used government to to line the pockets of the connected.