France: The Coming Waterloo

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In France, conditions appear to be set for a rout that - relatively speaking - bears a triple similitude with the defeat of Napoleon at Waterloo in 1815. Except that, this time, the scene takes place, not on the military-geopolitical ground, but in the realm of finance, and for that matter of the economy in general.

First similitude: in both cases there exists a gulf between, on the one hand, the illusions fostered by the ruling class and, on the other, the world as it actually is.

Indeed, just as Napoleon's France tried to impose her geopolitical pretensions upon the whole Europe even at the twilight of her power, so too a good tranche of today's political establishment in France keeps the public opinion under the illusion that a France with a shrinking weight in the world economy can maintain alive a profligate Welfare State that is seriously impairing the country's competitiveness and finances.

A manifestation of this Napoleonic rejection of reality relates to the flow of extravagant, capitalism-bashing stances taken during the current electoral campaign. In order to explain why things go bad in France, presidential candidates make believe (some more than others) that the culprit of the country's woes is to be found in the outside world - globalization of the world economy, low wages in emerging economies, "voracity" of financial markets, transnational corporations' search of profit-maximization, immigration flows - rather in France's dispendious "social model" and labor-market rigidities.

Most worrisome of all is the fact that the likely winner of this presidential contest according to all the polls, namely Socialist Party's François Hollande, has been prolific in making counterproductive promises. These include: restoring the retirement age to 60 for a number of categories of workers even though the trend everywhere else in Europe is toward pushing back that age; the creation of 60,000 jobs in public education, even though France already has a public spending to GDP ratio above 50 percent; and higher income taxes.

Measures of this kind tend to deepen public deficits and kill incentives to invest, induce financial markets to request higher interest rates on France's sovereign debt and undermine further the country's competitiveness.

The markets have begun to worry. In an interview given to a French radio station, George Soros said that he expects the markets to attack France's sovereign debt after the presidential election. Bank of America has in turn published a study indicating that, among the major European economies, France is, aside from Spain, the country that could most likely give a bad surprise in 2012.


To respond to these fears, Eurex, a consortium of German banks, has issued a new product, which - like an insurance contract - will allow holders of French state bonds to hedge against an eventual inability of France to redeem its debt on time.

Yet, as soon as the announcement of that product was made, François Hollande cried shame and requested the German chancellor, Angela Merkel, to intervene and prohibit the product in question.

That reaction, by itself, says a good deal about Hollande's misperception of the functioning of financial markets. (Incidentally, he has declared that his "true adversary is the world of finance.") Hollande appears not to understand that, thanks to the existence of that derivative, investors will be more willing to lend to France, since they now have now the means of protecting themselves from an eventual crisis of France's sovereign debt. Moreover, Hollande thinks that by prohibiting the product, fears about France's financial health - and the ensuing prospects of higher interest rates - would go away.

We thus reach the second similitude between the present situation and that prevailing in 1815: like Waterloo, the impact on Europe will be anything but negligible.

The reason? If the interest rates applied to France's sovereign debt increase significantly, France may need to ask for help from the recently created Eurozone bailout fund. By doing so, France would cease to be the second major lender of that facility (after Germany), becoming a borrower instead.

Such a transformation would be impossible to materialize. Germany has neither the political will nor the financial means to salvage, by herself, the sovereign debt of other countries in the Eurozone - especially not a debt as considerable as that of France. The bailout fund would no longer be operational, which would put pressure on both European sovereign bonds and the euro.

The third and last similitude between the situation of 1815 and the looming Waterloo has to do with tiny Switzerland, a country that - because of the prudent, market-oriented management of its economy - is ripe to benefit from France's vicissitudes, much as she did from Napoleon's failed ambitions.

It is worthwhile to recall that it was as a result of the Congress of Vienna of 1815 that Geneva became a full-fledged canton of the Swiss confederation, enlarging its territory by more than 60 percent with counties that France had to relinquish on that occasion. With the impending turmoil in France's sovereign debt, Geneva, and as a matter of fact Switzerland as a whole, may be expected to absorb from France, not new counties, but fortunes and talents in search of less hostile environments.

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