Damian Pudner has a useful CAPX piece on the looming fiscal crisis in France and a comparable situation developing here in the UK.
France’s fiscal crisis is a warning for Rachel Reeves
Across the Channel, France is staring down a full-blown fiscal crisis. Public debt has hit 114% of GDP, with the IMF expecting it to rise beyond 116% in the months ahead. The deficit is on track for 5.4% this year. Investors have finally lost patience with the French state’s long-standing habit of spending like Louis XIV – lavishly and without restraint – while reforming like Louis XVI, reluctantly and far too late. The consequences are plain. Ten-year borrowing costs have risen to 3.5%, the spread over German Bunds is at its widest in a decade, and the CAC 40 – France’s benchmark stock index – has shed more than 3% in just three days, dragged down by the banks...
This is a sovereign debt crisis playing out, in real time, in a G7 economy. Britain should be alarmed.
The whole piece is well worth reading as the umpteenth reminder that voting for spivs and shysters instead of a capable government was never going to be a sound idea.
Which brings us to Rachel Reeves. The chancellor talks endlessly of ’iron discipline’ and ‘stability’. Yet her most striking move has been to elevate Torsten Bell – a man whose career has been devoted to advocating higher taxes and a bigger state – into her inner circle. To investors, this signals not reform but resignation: the expectation that Britain will dodge the hard choices of structural change and instead lean on redistribution, conveniently repackaged as responsibility...
Markets do not price fairness. They price credibility and risk. If they conclude the Treasury is trading reform for redistribution, they will simply demand a higher return. With debt already near 100% of GDP, the arithmetic is unforgiving. Every notch higher in yields diverts billions from schools and hospitals into the pockets of bondholders. Redistribution, yes – but not the kind Reeves imagines.
- Public debt in France has hit 114% of GDP
- The situation in France shows you do not need to default to lose control
- If Reeves refuses to change course, she will discover – as France has now – the brutality of the markets
Across the Channel, France is staring down a full-blown fiscal crisis. Public debt has hit 114% of GDP, with the IMF expecting it to rise beyond 116% in the months ahead. The deficit is on track for 5.4% this year. Investors have finally lost patience with the French state’s long-standing habit of spending like Louis XIV – lavishly and without restraint – while reforming like Louis XVI, reluctantly and far too late. The consequences are plain. Ten-year borrowing costs have risen to 3.5%, the spread over German Bunds is at its widest in a decade, and the CAC 40 – France’s benchmark stock index – has shed more than 3% in just three days, dragged down by the banks...
This is a sovereign debt crisis playing out, in real time, in a G7 economy. Britain should be alarmed.
The whole piece is well worth reading as the umpteenth reminder that voting for spivs and shysters instead of a capable government was never going to be a sound idea.
Which brings us to Rachel Reeves. The chancellor talks endlessly of ’iron discipline’ and ‘stability’. Yet her most striking move has been to elevate Torsten Bell – a man whose career has been devoted to advocating higher taxes and a bigger state – into her inner circle. To investors, this signals not reform but resignation: the expectation that Britain will dodge the hard choices of structural change and instead lean on redistribution, conveniently repackaged as responsibility...
Markets do not price fairness. They price credibility and risk. If they conclude the Treasury is trading reform for redistribution, they will simply demand a higher return. With debt already near 100% of GDP, the arithmetic is unforgiving. Every notch higher in yields diverts billions from schools and hospitals into the pockets of bondholders. Redistribution, yes – but not the kind Reeves imagines.
3 comments:
Politicians, and the economists that advise them, live in a world of their own reinforcing each others opinions. Sometimes their views align with reality, and sometimes they don't - and the failures are blamed on *anything* but the politicians grasp of reality.
There is some speculation that the current government are hoping that future IMF advice or control will provide them with a 'get out of promises card' and provide political justification for swingeing cuts. But I don't think the Cabinet realise the resistance of their backbenchers to any cuts. We are in for a rocky ride.
There are dim-witted economists who like to say "Public finances are not like household finances." I say "Oh yes they are, except that public finances go bankrupt more slowly - until suddenly they don't."
DJ - I agree, they do politics, not economics and not the medium to long term welfare of voters and their families. Rachel Reeves talks economics but does politics and doesn't seem to be capable of anything else. Yes it is bound to be a rocky ride.
dearieme - yes, even the ability to print money doesn't absolve us from a comparison with household finances. We spend more than we can afford and we don't spend well, it's not complicated.
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