Amygdala

In Europe we are still supposed to think of France as a sensible country with its own nuclear launch codes and the right attitude to pirates and not a bunch of greasy, lying spendthrifts, which is what we now think of the Greeks, even though it was only yesterday that they were the blokes who brought us Euclid, democracy and delicious sliced meats at chucking out time.

France has not run a primary budget surplus since 1974. Leaving aside all the jargon and accounting trickery employed by governments, this means that every year for the past 36 years, the government of France has spent more money than it has collected. Every year, France has had to borrow a few francs and later on euros to cover its overspend. And since it’s overspending every year, it can’t just promise to pay this year’s overspend back all in one go next year without promising to raise taxes a lot or cut back on spending. Instead, it does what you and I would do. It promises to pay the money back over a number of years in the hope that it gets a big payrise before it’s cut off by Visa.

In the case of France, this payrise would be a big increase in national income with a corresponding increase in tax revenue. That would require flexible labour, increased productivity and a 50% reduction in the number of mistresses per prime minister. It is therefore impossible and so it hasn’t happened.

Finally, the people who look after your bank deposits and insurance premiums and all the other savings that people and companies have, have woken up to this, alerted by the smell of the burning kebab stall next door and the kerfuffle in Silvio’s spaghetti house down there on the corner of Nicolas and Merkel.

Between 1974 and now, these fixed-income investors didn’t really have jobs. You gave them your money. They gathered it all together and then bought government bonds. Governments always pay back those bonds, so these highly-paid managers didn’t really look at credit risk. Instead they messed around pretending to do complicated things to do with interest rates which took quite a lot of the day but didn’t really have much of an effect on anything. Then they had a splendid dinner followed by sex with the kinds of women who don’t care that the bloke they’re with has a face like a rotting rugby ball because he says the words ‘hedge fund’ a lot.

Suddenly though, it starts to look as though maybe France might, in the future, have a problem paying back its debt. Remember, these guys have to think about the future because some of the bonds they’ve bought don’t get repaid for 30 years. So they start to look at the big picture. And this is what they see.

Once upon a time, in 1974 before many of them were born, France was a simple country of onion strings and films about black and white bicycles and strong cigarettes. It had a little bit of debt and a small budget deficit. And it promised that the overspending was only temporary and it would soon get its budget back into balance and actually it was only investing this borrowed money in infrastructure and stuff that would produce a profit in terms of tax revenues in years to come, so that soon they would spend less than they took in in taxes and so could pay back the debts nice and quickly. This is the good France that the markets were happy to lend to. And they were right to do so.

But over time, France’s addiction to spending and its repeated lies about balanced budgets and paying back the debts has given way to the reality of an ever-growing mountain of financial obligations. At the same time, France’s economic growth has been pants and the promises successive governments have made to the French people in terms of cheese and lamb and pensions and healthcare have got more and more extravagant. So the bond investors have started to get edgy.

They’ve also started to pay more attention to the dodgy things the French government accountants have been doing to disguise how much debt they’ve got.

In France, every businessman or banker sits in front of an enormous organogram of his company that he can’t even find himself on, let alone explain. The most baffling of these belong to government departments and, knowing that no-one ever bothers to try to unravel them, the French government hides a ton of its debt inside these diagrams.

One of them is called Cades. It’s just one of those box-and-arrow pictures you remember from Enron that, in this case, makes social security debt go away by borrowing more money. I know that doesn’t make sense. But look, this is Europe. This is how we do things. This is why Greece, a country that represents just 2.5% of European GDP has enough debt to bring down the whole multi-trillion euro economy and cast its 320 million people into a life of slavery in China.

You can tell from its website what Cades thinks about debt. Cades loves debt. It takes debt to the Rue Rivoli and buys it lacy underwear and makes suave, sophisticated love to it between five and seven on Thursdays.  It wants more debt and it wants it now.

In its own words, Cades “enjoyed a strong position on the international [debt] market and raised €11.1 billion in mid- and long-term bonds in 2010, which puts us among the top-ranked issuers [people who borrowed the most] in the market. Our marketing strategy revolves around growing issues in foreign currencies, mainly in US dollars.”

Translation: we take pride in the fact that we are borrowing more money than anyone else and are exposing our country to even greater risks by borrowing in foreign currencies and at ever-longer maturities. Good job guys.

This stuff makes the bond investors start to sweat. This isn’t the sensible old France of 1974, this is a crazy France that’s stolen their credit cards, drunk a bottle of Pernod and crashed their Citroen into the casino. This is a France that, at the very least, needs to pay a lot more in interest if it wants to keep playing baccarat.

Now the French government thinks this is outrageous because their debt to GDP ratio is only 82% while Italy is 120%% and Greece is 160%. But history shows that 80% is about the point everything starts to go tits up. At that point it really matters what interest rates are. You’re now paying so much in interest on the debt that small rises have big effects.

In any case, the Maastricht Treaty, which supposedly set the rules for the Eurozone to ensure it was a sober and sensible place, sets the maximum debt to GDP ratio at 60%. Anyone who breaks that ceiling, er…that’s it. But if France hasn’t stopped at 60%, and there’s no sanction, where will it stop? And will anyone else play by the rules?

This is what the people who buy government bonds with your money and mine (the ‘markets’) have noticed. And while they may have been a bit late, thank God they did. After all have they been wrong about any of this? Or is Greece in fact solvent, Anglo Irish Bank profitable and Portuguese basket weaving a sensible post-industrial strategy?

France is no more creditworthy than the rest of the PIIGS unless it changes and it can’t change because like every other European government it is too scared to tell its population the truth. Which is that the average European did pretty well out of all this while it lasted but the gravy train has just crashed.

Let’s see. Governments have been overspending for decades. The biggest costs of almost any enterprise is staff so that translates as, “governments have been creating meaningless and overpaid jobs for people with few skills or qualifications for decades.”

French civil servant Corinne Maier’s book “Hello Laziness”, which got her into trouble for its descriptions of the five-hour week (yes, week) of her colleagues, is just the tip of the iceberg. (Their culture: “if you have nothing to gain from working, you have nothing to lose from doing nothing.”)

Even if you don’t work for the public sector, or if you do and you work hard, this government splurge inflated your earnings and made you feel more productive and important than you really were.

Maybe you worked for a consulting group that cost governments millions in failed IT projects; maybe you built or imported the computers they’ve thrown in the dumpster; perhaps you work for a bank on government private finance initiatives which cost taxpayers billions simply to hide the true level of government debt; or maybe you supplied office chairs to the Pentagon.

In other words, a lot of this borrowed money funded jobs that were unnecessary or made them more expensive than they should have been, or pushed up the price of goods and services and so corporate profits and allowed individuals, companies and whole economies to avoid the pains of restructuring to face the new and unpleasant realities of global competition.

Since 1974, when France had that low level of debt, the population of the globe has nearly doubled and whole swathes of the planet have become part of the global economy. Forget the billion in China and the billion in India, there are 240 million people in Indonesia, 91 million in the Philippines, 195 million in Brazil. The whole of Eastern Europe emerged from the shadow of Soviet central planning. Africa is stirring. It only takes a small percentage of all these countries’ populations added together to dwarf the demographics of the US or Western Europe and a lot of them are better educated and harder working than you or I.

But instead of recognizing that and changing, we got paid more money for doing less. We got a job with our lousy qualifications when we shouldn’t have, and better than that, we dumbed down our qualifications so much that they’re not so much qualifications as ways of working out who shouldn’t be allowed near the sharp things in the kitchen.

And if we didn’t feel we were getting rich enough fast enough, we borrowed to make up the shortfall. We used debt to buy cars we shouldn’t have been driving and houses we couldn’t afford. We filled those houses with televisions the size of football pitches, computers capable of modeling space flight which we used to play games on and all manner of overpriced designer clothing, perfume booze and food. But we haven’t earned most of this stuff. We’ve got it as a result of our own personal borrowing, that of the company we work for or the government. And now everyone’s maxed out.

But you try telling the French that. Or me for that matter. If you do, I’m going to vote you out because I want that pension at 55; I want that slack job down at the Mayor’s office; I want to keep what I’ve got and what I’ve been promised. And if you won’t give it to me, someone else will. And I don’t care if that’s a recipe for bankruptcy.

So goodbye France. Bon voyage. Tu ne regrette rien, right? On verra, mon brave, on verra.