In our post earlier this month, How the mighty have fallen, we wrote,
Why do we have this gut feeling Japan and France will be the countries of focus next year?
Sorry, we’re dismal scientists.
The Economist seems to share our worries, however. Their cover story this week begins,
Why France could become the biggest danger to Europe’s single currency
THE threat of the euro’s collapse has abated for the moment, but putting the single currency right will involve years of pain. The pressure for reform and budget cuts is fiercest in Greece, Portugal, Spain and Italy, which all saw mass strikes and clashes with police this week (see article). But ahead looms a bigger problem that could dwarf any of these: France.
François Hollande is France’s first Socialist president since François Mitterrand. His fall from grace has been hard and fast and is now the most unpopular French president after six months in office.
The Economist piece speaks to the country’s lack of competitiveness, overly rigid labour- and product-market regulation, exceptionally high taxes, high public spending and debt. It finishes with this stark warning,
Unless Mr Hollande shows that he is genuinely committed to changing the path his country has been on for the past 30 years, France will lose the faith of investors—and of Germany. As several euro-zone countries have found, sentiment in the markets can shift quickly. The crisis could hit as early as next year. Previous European currency upheavals have often started elsewhere only to finish by engulfing France—and this time, too, France rather than Italy or Spain could be where the euro’s fate is decided. Mr Hollande does not have long to defuse the time-bomb at the heart of Europe.
Of course, we’re not saying France is definitely going to crash. In fact, the government’s 10-year bond yield closed today at 74 basis points over the the 10-year German bund. This is about half of where it started the year.
Nevertheless, in order to “skate where the puck is going to [or may] be, and not where it has been“, we highly recommend you read the full piece. Keep it on your radar.
Bonne chance, Monsieur Hollande.
(click here if cover and video are not observable)