In Paris, protests are a national pastime. On one of our many trips, we inquired about a certain day to tour Versailles but were told it would be closed for a planned protest. But what’s going on now, from a boots-on-the-ground perspective, is more of a countrywide populist groundswell. The bond market is on edge. While there are many economies in the EU that have troubled finances, France’s is big enough to tank the union if it has a crisis. Investors are always worried when power changes hands. In France’s case, they’re worried that a new government could run the country’s deficits up even more than Emmanuel Macron has done. James Mackintosh reports in The Wall Street Journal:
France isn’t Greece. And that’s increasingly a problem. Unlike Greece, France has had little-to-no pressure to keep its finances under control, running giant budget deficits even as concern about its debt load built. Now, it faces a reckoning in the form of a snap election that polls suggest could be won by the populist far right with a high-spending anti-EU agenda.
Investors didn’t like it one bit. They haven’t concluded that France is Greece—but increasingly treat the country on a par with Spain or Portugal, once derided as members of the troubled “PIGS” alongside Ireland and Greece.
The French bond market’s wobble this week brought echoes of the 2010-12 euro crisis. The euro fell 1.3% in two days, bond yields surged, and bank stocks plunged. It’s nothing like as bad as things were back then, but French President Emmanuel Macron’s surprise vote spooked investors.
The good news is that France isn’t in the same state as the financially stressed eurozone countries in 2010. They faced much bigger problems, which led to bond yields so high they created a doom loop between banks and government debt. Disaster, bailouts, bank failures and, in Greece’s case, default followed.
The bad news is that France’s situation is getting worse. It was downgraded by S&P Global last month because of the combination of high debt and persistent government deficits. It is likely to get a slap on the wrist from the European Commission next week for failing to rein in borrowing. If it chooses populists and still-more borrowing, markets could lose faith.
At the core of the problem: The French government and its voters don’t recognize that the country needs to do anything. They share the insouciance of Americans, where neither candidate for the presidency has any interest in bringing the deficit under control. Unlike the U.S., France doesn’t have the security of the world’s deepest bond market backed by the world’s reserve currency.
Action Line: How long can a country’s finances rely on its stellar reputation when the rubber meets the road? Whether it’s France, the United States, or your family budget, at some point, you have to balance. Every retiree knows that, and every politician does, too. The trouble is that politicians will delay, hoping it can be the next guy’s problem. Your family doesn’t get that luxury when it comes time to pay the bills. When you want to talk about a balanced budget and your retirement, I’m here. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter.
