Dick and I have traveled to Paris more times than we can count. Always the running joke has been how much Parisians enjoyed demonstrating. We often chuckled along with those who referred to the upsets as being the French nation’s pastime. This time, as we are ready for a visit to Paris, it seems not so funny. The editorial board o f the WSJ puts it thus:
Ostensibly the destructive rioting of the past few days is a student protest against underfunded schools.
If you believe that, the WSJ board has a pont over the Seine to sell readers. The riots have been encouraged by leftist politicians, as Dominic Green recently outlined in the Journal’s “Free Expression” newsletter.
Leader of La France Insoumise (“Indomitable France”), (think Bernie Sanders with a Gallic accent) Jean-Luc Mélenchon, leader of La France, has stoked the unrest into riots. Mr. Mélenchon visited the barricades. It feels like a display of left-wing muscle-flexing before next year’s presidential election, in which Mr. Mélenchon will be a candidate.
The riots are covering a much bigger mess. France doesn’t have money to spend on schools because the French don’t have more money to spend on anything.
The recent global rise in bond yields has hit France particularly hard. As the Journal reports:
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The rate on the benchmark 10-year government bond last week exceeded 5% for the first time since 2002.
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The spread between French OATs and German bunds (the eurozone’s safest asset) is now wider than 140 basis points, the most since the eurozone crisis of 2010-12.
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The government last ran a fiscal surplus in 1974, and an annual deficit above 5% of GDP is normal. Debt stands at 120% of GDP.
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Revenue is inadequate to Paris’s spending urges, despite or rather because of high tax rates that extract 51% of French GDP each year.
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This taxation, exacerbated by endemic overregulation, is suffocating economic growth.
GDP grew 0.8% last year, is expected to do the same this year, and if they’re lucky it’ll hit 1.1% in 2027.
Is this why French yields remain below the rates on U.S. Treasurys? In America, investors are betting on growth in addition to Washington’s fiscal dysfunctions.
When and how did Paris form these spending habits? When the “European Central Bank was aggressively buying bonds under its quantitative-easing program.”
“In some years central-bank purchases of French debt exceeded net issuance. No longer. Current quantitative tightening leaves it to private investors to absorb French bonds and many of those investors, especially insurers and pension funds, are less willing.”
What’s Next
Paris cannot tax its way out of its fiscal hole. Nor can it borrow, so spending must be cut. Mr. Mélenchon says the central bank should simply forgive the French bonds it currently owns. Mr. Mélenchon accused the head of the French central bank of treason on Tuesday for suggesting spending cuts. “Off with their heads” has a long, if not glorious, history in France, Mr. Green writes.
The chances of Marine Le Pen of the insurgent-right National Rally might benefit from the riots. But she offers no more than token reform.
One of her signature issues is a pledge to reduce the retirement age to 60—after President Emmanuel Macron’s effort to raise it to 64 from 62 has hit political obstacles.
Don’t think that France’s main problem is an inability to handle mathematics. It is slow growth. Fiscal reforms that encourage work and investment – such as tax cuts and welfare and pension reforms – would create new opportunities for prosperity. Green notes how Young people would be the biggest beneficiaries.
The alternative is what’s happening in the streets.
Green also implores Americans not to gloat from the sidelines.
U.S. debt is 100% of GDP, and its politicians can be as feckless as the French. At least the U.S. economy is growing at a healthy clip, but that could change in a hurry with the wrong mix of regulation and a ham-handed attempt to tax our way out of our fiscal hole.
Dick and I look forward to visiting and reporting from France on its food and vibe. Stay tuned.
