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Nicolas Sarkozy (photo: European People's Party/flickr)
French President Nicolas Sarkozy was so worried about France’s AAA bond rating that he decided last year to run the French economy in accordance with the standards set by McGraw-Hill subsidiary Standard & Poor’s. Even as the probability increases that the precious rating will be lost, he continues to call for austerity. That decision to continue on the austerity path will hurt millions of French people. Why then is Sarkozy hell-bent on allowing an idiot checklist to determine the scope of the French response to past and predicted disasters?
It isn’t that hard to game the S&P sovereign credit ratings. The standards are available online, and apparently the people at S&P are available by phone to discuss the likely impact of policy choices, just as they were when the unelected representatives of McGraw-Hill downgraded the US. One thing that contributes to the French problem is that it is not sovereign in its own currency, a factor that could by itself lead to a downgrade. Paragraph 11, p. 4. So, as EU member states like Greece, Italy, and Spain weaken, the Euro weakens, and that affects the French rating.
Last November, in the face of a declining economy, Sarkozy installed a second round of austerity cuts, including an increase in the VAT, the national sales tax, from 5.5% to 7% on a number of items (thankfully not duck liver pâté), increasing taxes on the largest French corporations, and increasing the capital gains tax on second homes and homes held for investment. The retirement age will be moved up at a faster rate than originally scheduled. The plan does not, however, call for cuts to social programs, such as health care and pensions.
There is a sort of bi-partisan agreement on the need for austerity. The Socialist Party, currently leading in the polls for the election this April, is on board with the idea of austerity, if not the details. In fact, several articles quote leading members talking up an even larger austerity package, which will include significant cuts to social programs. Hollande talks a good game:
“Let’s not forget that since the beginning of Nicolas Sarkozy’s term, 75 billion euros in tax revenues were lost due to tax breaks given to large firms and wealthy households. It would have been legitimate to recoup some of these first, given that they have yielded no tangible benefit to the real economy.”
That idea of recovering “some” of the useless tax cuts sounds about as sincere as the calls of President Obama for an end to the Bush tax cuts for the rich.
It isn’t the workers of France who care about the AAA rating. One sign at a recent rally made the point: “To hell with the national debt. We’ll give them nothing and we don’t give a damn about their AAA!” I assume the corporate leaders of France agree with Sarkozy, but I don’t see any public discussion. Almost all French corporate and political leaders go to the same schools and they seem to see things the same way. None of them sees a connection between austerity and deepening economic problems. They call for more cuts as unemployment reaches a five-year high, and projections for growth for this year fall from 1.75% to below 1%. A real socialist might think that the goal of French business elites is to cut the wages of French workers.
Meanwhile, it isn’t clear that the AAA rating matters anyway. France did quite well in its last bond auction, leading one to wonder whether the opinions of the credit rating agencies are relevant to anyone besides the French elites. Of course, the record of the credit ratings agencies speaks for itself.
It may be that part of the answer is that the credit rating agencies have made it clear that in order for the European Financial Stability Facility to maintain its AAA rating, France and Germany must retain theirs. The EFSF is part of the system rigged up to deal with the Eurozone financial problems. It has the power to raise money through debt issues guaranteed by members of the EU, and lend it to governments, buy sovereign debt, and recapitalize banks. France has made substantial guarantees to the EFSF.
It looks like the basis of French austerity is its participation in the Euro. In turn, the stability of the Euro is dependent on the feelings of a bunch of unelected Americans from companies that have missed every important financial event since forever.
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I guess they aren’t big fans of John Maynard Keynes at the Paris School of Economics.
Sarkozy only cares about what Wall Street and their European subsidiaries tell him to care about.
There is this notion that a reduction in income will result in an increase in exports. That, in turn, will lead growth. Everyone else is doing it, so you have to keep up.
In any case, they do not control their currency and so they are at the mercy of S&P and the bond vigilantes – - and the idiots at the IMF. The IMF never makes a forecast you know.
It is a shame what is going on over there in Europe but they will likely keep trying to muddle through.
Whether they heard of Keynes or not you can’t increase your spending and deficits when everyone else is not doing it. That will lead to the need for more debt and higher interest rates bc they cannot control the rates like a soverign nation can. They are just f’d.
Once it was established that the “Chicago Boys” could institute Friedman’s disaster capitalism model in a democracy, as in Bolivia, without the necessity of an autocracy, as in Pinochet’s Chili, this economic model that benefits the top 1% has become become de riguer. We’re living it right now in the USA.
Their bond auction yesterday day went pretty well, but if you look at the spreads to the German bunds it’s not as pretty of a picture. Smaller economies like a Greece can in fact deal with highly elevated bond yields (not what they are currently experiencing, go back a year or 3). But a larger economy like France, which has a financial sector that is connected to the rest of the mess in Europe. The downgrade is somewhat of Sarkozy’s own making for sticking so close to Germany. His childish comment on war in Europe smacks of what Merkel said months ago. They don’t seem to remotely understand how any of this works, or they do and don’t give a rats. I’m inclined to lean to the latter.
I think the recessions are a bigger problem than the ruling parties of Europe realize. The US is going to take market share as the Euro weakens. The thing about the bonds is that investors don’t have a lot of choices in buying reasonably safe bonds, because all countries are going downhill at the same time.
The puppet masters break the bank with their
corrupting of democracy.
Their puppets’ demagoguery transfers the blame
for the folly onto the middle class, as if it
hasn’t in fact been shafted by that exact sort
of bullxxxx for decades.
The puppet masters thus expect to even further
force themselves on you (if that sounds like
a rapist or someone jxxxxxx on you instead of
into the toilet, that’s actually a part of
what I’m saying.)
Here are the munchkins, in very small part:
the Basij.
This guy (who simply looks like the “transference” part of this.)
http://articles.businessinsider.com/2011-01-14/entertainment/30008786_1_photos-g-string-gun-culture
In 1929 the wealthy ran of of persons to lend to. They continued lending to the middle class.
This time, the risk was bought by others who appear being the main
group of super wealthy who don’t want to lose their equity to the rest of the world
(it was also shorted by others, those parties appearing to have been quickly pandered
to already.) And, Mr. Sarkozy himself may simply not see how he can force his own few dominant
banks to take large losses when his own middle class can suffer them instead of seeing
a fair banking resolution.
Rating agencies aren’t the culprits here. The real culprits are the Eurocrats who cling to their Euro nonsense no matter how many people get hurt. A single currency for many countries means a single set of exchange rates for many countries. Can’t work – countries are too different. It’s the Eurocrats who are screwing millions over so they can cling to their Euro insanity, and their cushy jobs, who are to blame.
If S&P’s utterings are bogus, Sarkozy should simply tell investors so. Maybe they’ll listen to him? But if if investors don’t respond to Sarkozy’s liking, then maybe S&P isn’t the core problem after all.
The raters have been ignored in some times past. When Japan got bad grades everyone yawned, no?
So maybe Sarkozy is just another Eurocrat beating his gums, and the markets know better.