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The French Road to Perdition

How will the outcome of the French presidential election influence the fate of Europe’s monetary union?

April 26, 2012

How will the outcome of the French presidential election influence the fate of Europe's monetary union?

The second round of the French presidential election on May 6 is important not only to France. On it rests the future of the euro. Spain, about which the markets have been agonizing for the last few weeks, is merely a sideshow.

For all of Spain’s problems, it has only moderate levels of international debt and could, in a true pinch, be bailed out by its European partners. Not so in the case of France. That country’s economy is both considerably larger and, when looked at closely, in poorer shape.

Should France get into trouble with the markets, it would leave a rather small group of nations with the “duty” of supporting it. If Nicolas Sarkozy is re-elected, France will probably muddle through (although the concessions he will have to make to the right-wing National Front in the second round of voting are quite ominous).

But better the devil you know. The policies of his opponent, Francois Hollande, are sufficiently bad that if he is elected the collapse of both French public finances and the euro system are very likely.

Historically, France has been even modestly committed to the market only for brief periods. Its civilization is among the great glories of mankind, its scientific advances are immense and its cuisine is superb — but economically even these great virtues have failed to make the place truly prosperous.

The problem is the innate philosophical belief that markets are an Anglo-Saxon abomination, to be regarded with deep suspicion and circumvented wherever possible by government intervention.

Government spending of 56% of GDP (compared to Spain’s 45%) leaves little room for the private sector to flourish, while budget deficits every year since 1974 have caused France’s public debt to soar to 89% of GDP in 2012, substantially larger in relation to GDP than Spain’s.

Deep flaws in the French system?

The Ecole Nationale d’Administration has produced generations of superbly trained technocrats, far ahead of Britain’s late-blooming business schools, but very few entrepreneurs.

According to Angus Maddison’s historic data, France’s GDP per capita reached only 64% of Britain’s in 1900, rising to 76% by 1950. By 1974, it had risen to 113% of Britain’s GDP, its last year of budget surplus (and the year the capable rule of Georges Pompidou ended).

However, by 2010, France’s GDP was back down to 96% of Britain’s. That is a fairly modest relative decline, but it came against a country that was managed less than optimally during the period. It suggests that, splendors of Paris aside, there are deep flaws in the French economic system.

Those flaws have been demonstrated by French politicians’ reaction to the euro crisis. Even a nominally center-right government, when austerity measures became unavoidable late last year, proposed budget balancing measures of which in the first year 76% were represented by tax increases and 24% by spending cuts.

France’s tax-centered austerity has resulted in a sharp decline in already anemic economic growth. Meanwhile, the budget deficit continues to overshoot forecasts.

Yet Sarkozy is committed to the European stabilization plan he has worked out with Angela Merkel, and while financial markets’ attention remains on Spain, France’s deficits should continue to be financeable. And that is how, if Sarkozy is indeed reelected, France just might continue muddling through.

Francois Hollande, the likely successor to Sarkozy, favors a top income rate of 75%, the reversal of Sarkozy’s pension reforms, and a substantial increase in public spending. He also enthuses his followers by calling for the “Spirit of ’81,” referring to the first election of Francois Mitterrand.

The policy of Mitterrand’s first two years — socialism in a fairly pure form — resulted in three devaluations of the franc and a sharp increase in the country’s unemployment rate. It also led to bank nationalization, after which financier Guy de Rothschild uttered the immortal line: “To be a Jew under Petain [the French Vichy Republic wartime leader] was bad enough, but to be a banker under Mitterrand, c’est insupportable.”

If markets had full confidence in French credit, a Hollande victory would doubtless be manageable. But they don’t — and nor should they. A run on French government debt could become inevitable, and would be accompanied by further attacks on Italian and Spanish debt.

At that point, the destruction of the euro would appear certain. There is simply not enough of a base of soundly run countries to bail out France, Italy and Spain simultaneously. Once the euro had disappeared (or had become a “strong currency” bloc led by Germany), even a French debt default would not be inevitable.


The problem is the innate philosophical belief that markets are an Anglo-Saxon abomination, to be regarded with deep suspicion.

The Ecole Nationale d'Administration has produced generations of superbly trained technocrats, but very few entrepreneurs.