2012 December 23 Sunday
France: The Moderate Basket Case

With a top tax rate of 75% France is going to lose its highest earners. Multinationals will find reasons to station higher paid people in other European countries. The most ambitious young will move to London or Belgium. The French debt level is high enough to be an additional drag on economic growth on top of the tax drag and aging population drag and failed immigrants drag.

Meanwhile, France’s accounts make grim reading. Public debt stands at more than 90 percent of GDP and public spending at 57 percent, a eurozone peak; unemployment is above 10 percent (over 3 million), rising to 25 percent among the young and to much higher levels in some deprived suburbs; and successive downgrades of its vaunted triple-A credit rating have struck a blow at France’s financial standing.

France has a way to decline to catch up with the BBB levels of the worst Euro nations. But the Socialists seem like they are unlikely to change France's course enough to prevent further decline. I am struck by how vulnerable the world has become to another financial crisis. So much debt was run up in the aftermath of the last one that the next one will cause many defaults.

Check out this handy table of how a long list of sovereign national debt is rated by Moody's, Fitch and Standard & Poors. S&P has the lowest ratings overall. Though they all agree on total basket case Greece and are close on serious basket cases like Spain, Portugal, and Italy. Portugal looks like the next Euro default. Triple A ratings have become the exception.

Moody's has France on a negative outlook. So Moody's expects further deterioration.

Frankfurt am Main, November 19, 2012 -- Moody's Investors Service has today downgraded France's government bond rating by one notch to Aa1 from Aaa. The outlook remains negative. Today's rating action follows Moody's decision on 23 July 2012 to change to negative the outlooks on the Aaa ratings of Germany, Luxembourg and the Netherlands. At the time, Moody's also announced that it would assess France's Aaa sovereign rating and its outlook, which had been changed to negative on 13 February 2012, to determine the impact of the elevated risk of a Greek exit from the euro area, the growing likelihood of collective support for other euro area sovereigns and stalled economic growth. Today's rating action concludes this assessment.

Moody's does not think France is going to grow out of its problems. Plus, France is on the hook for debt in even sicker southern European countries. Plus, the French people aren't wiling to accept cutbacks in the size of the welfare state and in labor market rigidities.

A big shock, say a big oil price spike, would start a lot of dominoes falling. We've eaten thru our safety buffers. High oil prices and other factors prevent fast economic growth. Helicopter Ben Bernanke is already doing $85 billion per month of quantitative expansion to the dollar money supply. We don't have a lot more tools left in the toolbox to try to make economic conditions better. Most of those tools (e.g. stop low skilled immigration, cut incentives for not working) can't be used anyway because powerful political constituencies would block their use.

Share |      By Randall Parker at 2012 December 23 09:55 AM 

DirkY said at December 23, 2012 3:34 PM:

Paris is about a million times nicer than Brusseles or London. The latter also has a cost of living about double that of Paris, and is colder and uglier.

Keeping the super wealthy from making large cities unlivably expensive is a good reason to have confiscatory tax rates on the super rich.

Mercer said at December 23, 2012 8:06 PM:

Young people should not move to London if they want to buy a house.

According to the map you link to Europe is in better shape than most countries other than the US, Canada and Australia. When most of the world is struggling to pay debt inflation looks like the best course to me.

Randall Parker said at December 24, 2012 10:20 AM:


Northern Europe is in better financial shape than southern Europe.

nonaton said at December 24, 2012 5:00 PM:

Idiots deserve what they're going to get.

commonwealth contrarian said at December 30, 2012 10:26 PM:

Britain went in for this stuff in the late 60s and early 70s and yes, it all went pear-shaped, apparently the Beatles' song "Taxman" is about the so-called "super tax" on the rich.

Mercer - yes London is indeed a rip-off to be avoided, I'd add that the reason London is so damn expensive is just about the entire English economy is concentrated in the South East. They should move more economic activity up North/West etc, why do think America, Germany, Australia etc have their capitals away from their main financicial cities? no wonder Britian has so much financial corruption and urban decay.

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