Austerity is a Four-Letter French Word
By John Mauldin
June 21, 2013



A Great Deal If You Can Get It
Cyprus, Croatia, Geneva, and a Search for Art


The France that I see as I look out from the bullet train today is far different from the France I see when I survey the economic data. Going from Marseilles to Paris, the countryside is magnificent. The farms are laid out as if by a landscape artist – this is not the hurly-burly no-nonsense look of the Texas landscape. The mountains and forests that we glide through are glorious. It is a weekend of special music all over France, and last night in Marseilles the stages were alive and the crowds out in force. The French people smile and graciously correct my pidgin attempts at speaking French. I have found it diplomatic not to mention that I think France is in for a very difficult future. Why spoil the party?

But for you, gentle reader, I will survey the economic landscape that I see on my computer screen. It shows a far different France from the one outside my window, one that resembles its peripheral southern neighbors far more than its neighbors to the north and east. The picture is not all bad, of course. There is always much to admire and love about France. But there are a lot of hard political choices to be made and much reform to be undertaken if this beautiful country is to remain La Belle France and not become the sick man of Europe. This week, in what I think will be a short letter, we’ll look at a few of the problems facing France.

A Great Deal If You Can Get It

Yesterday (June 20) the French called a Grand Summit of businesses, unions, and government officials to address the needed reforms to make France more competitive and its national budget more sustainable. Debt and deficits are high and rising as the country rolls into yet another recession in response to President Hollande’s hard left turn last year. One of the key issues is a very controversial plan to reform pensions.

Stratfor notes:

France spends roughly 12.5 percent of its gross domestic product on pensions, more than most almost any other Organization for Economic Co-operation and Development member. (For reference, Germany spends about 11.4 percent of its GDP on pensions, and Japan spends roughly 8.7 percent.)

[Note: elsewhere we find that France has a comprehensive social security (sécurité sociale) system covering healthcare, injuries at work, family allowances, unemployment insurance, and old age (pensions), invalidity and death benefits.  France spends more on ‘welfare' than almost any other EU country: over 30 per cent of GDP as a total entitlement cost. As a reference, that would be about $5 trillion in the US.]

The fact that an increasingly larger proportion of France’s population qualifies for pensions factors into the debate. In 1975, there were 31 workers paying contributions for every 10 retirees; today, there are 14 workers paying contributions for every 10 retirees. As the baby boomers from the 1950s and 1960s begin to retire in the next decade, the pressure on France’s coffers will grow substantially. The deficit of the French pension system is projected to double between 2010 and 2020, when it will exceed 20 billion euros.

It is hard for Americans to understand just how much it costs to support the average French worker (or to be self-employed). From Paris Voice:

Total social security revenue is around €200 billion per year and the social security budget is higher than the gross national product (GNP), i.e. social security costs more than the value of what the country produces. Not surprisingly, social security benefits are among the highest in the EU. Total contributions per employee (too around 15 funds) average around 60 per cent of gross pay, some 60 per cent of what is paid by employers (an impediment to hiring staff).  The self-employed must pay the full amount (an impediment to self-employment!)  However, with the exception of sickness benefits, social security benefits aren’t taxed; indeed they’re deducted from your taxable income.  Equally unsurprisingly, the public has been highly resistant to any change that might reduce benefits, while employers are pushing to have their contributions lowered.

And of course, almost the first thing that Monsieur Hollande did when he took office last year was to return the retirement age at which you qualify for a pension back to age 60 from the extremely controversial 62 that his predecessor, Sarkozy, had barely managed to push it to. Sarkozy’s “reforms” were greeted with massive protests, and Hollande used them to engineer a sweeping election victory for the Socialists. (I put “reforms” in quotes because nowhere else would a retirement age of 62 be seen as draconian, nor would the rest of the changes Sarkozy pushed through.)

Hollande faces a whole series of problems. Ambrose Evans-Pritchard notes:

The IMF’s Article IV Report on France published before the elections draws up the indictment charges: a state share of GDP above 55pc (or 56pc this year), higher than in Scandinavia, but without Nordic labour flexibility.

One of the rich world’s highest life expectancies but earliest retirement ages, a costly mix. Just 39.7pc of those aged 55 to 64 are working, compared with 56.7pc in the UK and 57.7pc in Germany. “French workers spend the longest time in retirement among advanced countries,” [the IMF] said. (the London Telegraph)

France has the highest tax and social security burden in the Eurozone and the second lowest annual working time. There has been a sharp rise in unit labor costs, making France even less competitive.

These developments have not gone unnoticed in Germany. A report by one of the conservative political parties there (the FDP) said, “French President Francois Hollande was trifling with reform, scarcely making a dent on the sclerotic labour market. Which is true of course. Hollande was elected in May 2012 on a campaign to preserve the status quo and protect the privileges of the French.” (Ambrose Evans-Pritchard, the Telegraph)

Not helping is the fact that France had a very anemic “recovery” after the Great Recession (never more than 1% a year) and is now back in full recession. Which means that tax revenues will go down, not up, and that deficits will swell.

And things are likely to get even worse. Charles Gave notes that French manufacturing is plummeting, and this has always led to further losses in GDP. The chart below from GaveKal shows the French Business Climate Survey advanced forward 9 months and the highly correlated GDP number, which follows. The IMF is now predicting a 2% annual recession in 2013, which means rising unemployment and very tepid 0.8% growth in 2014, not enough to really spur employment.

You can read a half a dozen reports and analyses of the French predicament, and they will all mention “labor rigidities” as being part of the problem. There is a high minimum wage cost, and it is hard to let employees go in difficult times, which discourages businesses from hiring young, inexperienced workers. New business start-ups, the source of real job growth, have fallen as a result of the relentless assault by the bureaucracy on entrepreneurs, not to mention the impredations of the tax-man. Corporate profit margins are thin in France, and companies are leaving for locales that afford them more-attractive cost options.

Debt servicing costs as a percentage of GDP have plunged in France from 3% in 1995 to 2% (today) even as the total amount of debt has risen four times. Low interest rates can be a thing of beauty if you want to lower costs, but when interest rates rise (and they would with a vengeance in the not too distant future if the ECB were not ready to step in, as the market clearly expects it to do) they can cripple a government already burdened with too large a deficit and unwieldy commitments. But without real reforms, how long will it be before the market sees France as another problem child, like Italy and Spain?

Austerity is a four-letter Anglo-Saxon – or even worse, Teutonic – word in socialist France, yet the market at some point is going to want to see a move toward sustainable budgets. Government bond investors are not philanthropists. They look for the least risk they can find. A realistic assessment will soon be made that France is no longer in the least-risky category.

Compounding Hollande’s problems is a growing disenchantment with the whole European project in France, the putative home of the movement for integration.

No European country is becoming more dispirited and disillusioned faster than France. In just the past year, the public mood has soured dramatically across the board. The French are negative about the economy, with 91% saying it is doing badly, up 10 percentage points since 2012. They are negative about their leadership: 67% think President Francois Hollande is doing a lousy job handling the challenges posed by the economic crisis, a criticism of the president that is 24 points worse than that of his predecessor, Nicolas Sarkozy. The French are also beginning to doubt their commitment to the European project, with 77% believing European economic integration has made things worse for France, an increase of 14 points since last year. And 58% now have a bad impression of the European Union as an institution, up 18 points from 2012. (Tyler Durden, Zero Hedge)

And Stratfor adds:

Hollande thus faces a dilemma: He could try to push for comprehensive reforms unilaterally, but that would be incredibly unpopular, at least in the short term. Otherwise, he could try to enact diluted reforms, which would be more palatable for French citizens but ultimately would be ineffective at reducing the costs of the French pension system.

Hollande’s problem is shared by many Western European leaders, who have responded to the ongoing economic crisis by implementing painful reforms in their welfare states. The problem is that countries consider the welfare state one of the defining economic, political and social features of postwar Europe and a symbol of economic prosperity. The French have a long and rich tradition of fighting for their civil and social rights, and the notion of a social contract between rulers and the constituents is a key feature of French politics. For the French – not to mention the Italians, Spanish or Germans – a generous welfare state is an acquired right, a part of the social contract in Europe.

But what one group may see as an acquired right another will see as a tax burden, excessive cost, and unwanted risk. This is not just a French problem, of course. Governments everywhere have promised far more than they can ever deliver. And when a program gets prohibitively expensive, adjustments will be made. It goes without saying that when you cut a promised benefit to people who are already retired or soon will be, they will not be happy.

In July, 2012 Hollande called the first Grand Summit to solve the very same problems that were still facing at the latest one. As there is not yet a true crisis, no imminent cliff to fall over, I doubt that anything of substance will get done. Which means there will be yet another conference in the future as the stress intensifies.

Hollande is now down to a 30% approval rating. True reforms would anger his base, and a lack of them will lead to even lower ratings by the markets. He has no standing within his own party to force a compromise; and as elections draw closer, fewer and fewer within his party will want to be seen in a photo op with him.

France is on its way to becoming the new Greece. In 20 years, the Harvard Business School will do a case study on what not to do when faced with a massive fiscal crisis. France and Hollande will be Exhibit #1.

Cyprus, Croatia, Geneva, and a Search for Art  

I am in Paris this weekend, meeting with my Mauldin Economics partner Olivier Garret in his home country. (He now lives in Vermont, so he still resides in a socialist state.) I fly to Cyprus on Monday morning, where I will have a series of meetings with local businessmen and officials for two days. I speak Wednesday evening at 6 pm at the Central Bank, through the auspices of the University of Cyprus and the Cyprus Chamber of Commerce, on the topic of “Currency Wars and Quantitative Easing.”

Then I leave irrationally early the next morning for Split, Croatia, where I will spend a night before being gathered by the rogue Irish economist David McWilliams for a few days of relaxation and laughter. It is impossible to keep from laughing for very long around David, even when he is telling you that you are doomed. He has Irish gifts in abundance.

On Sunday I fly to Geneva, hoping my bags get there with me, to have meetings and face yet more deadlines; but I’ll also get to enjoy an encore al fresco dinner with Herwig van Hove and friends. I see that several mutual friends will be there, chief among them Louis Gave, who will be in town for a different set of meetings.

I remember (I think it was two years ago about this time) that Herwig hosted another dinner party where Louis’s father, Charles, was in attendance and in rare form. I remember there were 16 people present, all involved in the investment business in one way or another. Charles and I were at the center of the table facing each other, bantering back and forth, with me serving as the straight man for Charles.

It was a gorgeous summer evening and the table was relaxed, with the wine and food matching the magnificence of the weather. We were debating the valuation of the euro, and I asked for a poll of the group as to whether they thought the euro would be higher or lower the next year. The show of hands had 11 voting lower, 7 thinking higher, and one abstention. (Yes, that is 19 votes for 16 people, but there were a number of economists present, who evidently felt compelled to vote in both directions, presumably using different hands, at least.)

I will remember the next moment all my life. I had noticed that Charles did not vote. I asked him about that, and he answered in that authoritative tone of voice that sounds to me exactly like what the voice of God should sound like, punctuating the air with his finger for emphasis, “John, that is an absurd question. The euro will not exist in a year.” I will remind Louis and the table of that moment and ask the same question if Herwig will allow me – and I’ll report back.

I am in the midst of designing a new abode. Since it has been a very long time and I’ve undergone a few personal reinventions since I last owned a home, I have never really collected much in the way of art. And while I am not in a hurry to do so, I now find myself with an opportunity to discover some special pieces that I will enjoy seeing and sharing on a regular basis. I have “placeholder” pieces that can suffice while I patiently look, but I am currently seeking one special piece to hang over my dining room table. I am not looking for a chandelier, but rather a light that is art in and of itself. The apartment is a floor-to-ceiling glass high-rise, ten-foot ceilings, very open; and the table is glass. The overall theme is contemporary modern. When you walk in, almost the first thing you will notice after the view is that one piece of art suspended over the dining room table.

Except that I don’t know what it is yet. Since my readers obviously have exquisite taste,  it seems reasonable to ask you. I am very open to suggestions.

It is time to hit the send button as there is a music festival near here that needs my attention. Although last night I ended up in an Irish pub in Marseilles, listening to old ballads as I read and thought. Have a great week and spend a few moments with friends. They always pay the best dividends.

Your planning on seeing a few museums analyst,

John Mauldin

Category: Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

12 Responses to “Austerity is a Four-Letter French Word”

  1. ilsm says:

    Tea Party flags, rubber chicken financial planner bait!

  2. Willy2 says:

    - I can agree with the german point of view because Germany not only subsidized Spain, Italy & Greece, it subsidized France as well.
    - In the early 1990s the age for retirement in France was at 55 years.

  3. eideard says:

    Austerity is a 5-letter French word: merde

  4. Joe Friday says:

    France is on its way to becoming the new Greece.


    This tirade against the ‘welfare state’ is merely the same failed and baseless argument made by the RightWing in this country. They continue to promulgate a solution that will never work for a problem that does not exist.

  5. DeDude says:

    So France spends 30% of its GDP to ensure a fair floor (worthy a rich industrialized country) under everybody. Outrageous; they should spend their money on making rich people richer and get their GINI index moving up like ours instead of down.

    The sad part is that France actually have found the only sustainable path to retaining the productivity of capitalism without allowing the predatory greed of the 1%’ers to kill it (by destroying the consumer class and thereby the economy). Because it is so hard to retain an undivided unionized 99% as counterweight to selfish destructive greed, a government run income redistribution system is the only way to prevent the destruction of the consumer class. However, when France hooked their currency together with Germany, they not only ensured that the German export economy could exploit them, but also that they ultimately could not run their society in any different way than what Germany is doing. Predatory capitalism is baked into the Euro for all the participating countries because that is what Germany does to ensure continuation of its merhantilism (the only defense against merhantilism is currency depreciation).

    Problem is that as work is destroyed by automation, the ability to have a 45-year fully employed carrer is also destroyed. In a system of predatory capitalism, this means an unrelenting downward push on wages, making consumption and retirement a less obtainable goal for the majority of the population. You can pad that over with lose consumer credit and housing bubbles for a limited time, but ultimately it all crashes, because sustainable consumption requires sustainable income. Then you end up with a third world economy where the 1% have 99% of the assets and 99% of the consumption and the rest barely have enough food to survive – and that can neirther sustain the kind of GDP/person, nor the military industrial complex that industrialized countries have.

  6. sellstop says:

    While I was typing De Dude beat me to it!

    Here it is anyway:

    I’ve been re-reading Mauldin’s “Engame” lately due to what is going on in Japan. But aside from those points he makes about debt and the inability of a country to grow when burdened by debt, I notice that himself and Reinhard and Rogoff whom he quotes quite often, and indeed has at least a chapter devoted to in the book, often use the term “unproductive government spending” and that the money could be used for “productive private investment”. The say this so often and take it for granted so much that I can’t help but ask, “Is government spending by definition ‘unproductive’”?
    Was the money that the U.S. spent on the interstate highway system unproductive? In the short run or the long run?
    Was the money that the govt. spent encouraging settlers in the west unproductive?
    Were the railroads, that were encouraged and subsidized by huge govt. grants of land and money unproductive?
    Was going to the moon unproductive? Didn’t it yield huge research gains in technology?
    Is war unproductive? Yes! Really?
    Does spending money on mass transit make a city less productive? I suppose it depends on how well the specific situation is planned out.
    Is medicare spending unproductive? The alternative is a greatly reduced ability for people to pay for medical care, and a reduction in research. I suppose if you consider the elderly to be a drag on the economy keeping them alive is counterproductive…
    Is productivity the endall for advancement as a society? What is “productivity” anyway? Is it the fact that we can produce more things by using less people to make those things? Then how do we distribute all of this largesse to those without jobs making things? I know, they go on to do other things… Things that are LESS productive I suppose.
    I think productivity in the private sector refers to the ability of a company to compete and make money better than it’s competitors. Usually by cutting costs and laborers. That is certainly “productive” for the owners of the company. Is it productive for the people living in the area, county, state, country? World?
    And if competition is good for productivity and if productivity is good for the “economy” then why are we in so much debt?
    Just thinkin’,
    (Sounds like an Andy Rooney, bless his soul)

  7. beaufou says:

    La belle France wasn’t built by technocrats draining every penny out of the real economy, even Louis the XVI tried to reason with the robber barons to no avail. What you see outside that bullet train window is the result of centuries of struggles by what you regard as leeches on the back of a financial world gone mad.
    As a reminder, if France hadn’t borrowed from private bankers since 1973, its debt would be minus half a billion. The Government is paying as much interest on the debt as it collects from income revenue. Bending over for thieves? never

  8. kaleberg says:

    France has always marched to a different drummer economically, but somehow manages to do surprisingly well. It is rather silly considering the lack of student debt, good social services and early, comfortable retirement are not necessarily bad things. The number of billionaires is not really a very good measure of how well an economic system is working. Perhaps the French realize this.

  9. mitchn says:

    The Eurozone will not survive the coming storm. So passe now, nation states and sovereign currencies will make a come-back — sooner than the banksters think.

  10. DoubleD says:

    Just read the (beginning of the ) article and wonder where you got you information from…. I don’t mind French Bashing but at least do it with style ;-) This is embarassing! The securité sociale with revenue over GDP?? You can’t be serious….
    FYI: Securité sociale Revenue is 300 Billions EUR in 2011 and the French GDP is $2.609 trillion USD in 2012. I’ll let you do the conversion to Euros.
    At least get the data right when you write the article…. I’m not saying everything is perfect as far as the French economy is concerned but it is clearly not what you are showing… You seriously need to research before writing