Andrew Van Sickle editor@moneyweek.com
“How can anyone govern a country with 246 varieties of cheese?” Charles de Gaulle famously wondered. Not, perhaps, with the Fifth Republic he helped design. The upheaval in France (see pages 4 and 10) has prompted another spate of articles about a Sixth Republic in France, especially in the German press. This is partly schadenfreude. When all you read about is how your country is the sick man of Europe, a potential constitutional crisis next door makes a pleasant change. But it is also because ructions in the French bond market, and a possible new outbreak of the euro crisis, rapidly become Berlin’s problem.
Consider how this might play out. The centre has been squeezed mercilessly between the far right (RN) and a far left bloc. As The Economist points out, the latter’s fiscal wish list was dismissed by a French business boss as “‘such madness’ it makes the watered-down RN wish-list look almost reasonable”.
The centre has not held
But the key point is that they are both highly spendthrift, statist outfits with long shopping lists and even less interest in trying to stay below the EU’s budget deficit limit of 3% than the current government. France has not run a surplus since 1974 and the annual overspend last year reached 5.5%. A government heading even further in the wrong direction, or for that matter a minority government leading to total paralysis and likely further fiscal drift, would further unnerve debt holders.
The proportion of overseas investors is higher than in other big bond markets. Last year, according to the International Monetary Fund, foreign investors held roughly 50% of the French public debt market, compared with about 30% in the US, UK and Italy. So it looks vulnerable to an exodus.
As bonds fall and yields rise, making it harder to service the debt pile already worth 110% of GDP, a vicious circle of selling could set in, as it did with Greece, as the prospect of getting on top of the debt seems ever more unlikely. It will fall to Germany, currently trying to keep a lid on its own spending, to design a fudge – or hold its nose and countenance yet more quantitative easing, perhaps – to calm things down. The broader point is that deficits don’t matter (as leftist economists and right-wing supply siders both like to say) until the bond market decides that they do; remember Liz Truss.
Where else might deficits come to matter m
