Friday, 25 May 2018

Greece, Spain and Portugal are keeping the flies off France, but...

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It is hard to argue, even by the most ardent members of the glass-half-full brigade, that the unrest which has beset Spain and Greece in the past few days comes as a great surprise. The discrepancy between what governments are able to fund and what citizens have grown to expect seems to be widening rather than narrowing as fiscal revenues continue to fall faster than demand for services.

Anthony Peters, SwissInvest Strategist

The age old dichotomy which has social costs rising when the economy is delivering least jobs and hence tax take can only be dealt with by riding out the prevailing economic cycle. Yet the tinkering with that very cycle, the artificial suppression of the downturn at the turn of the century, has now come back to bite us all.

In the midst of all this, I received an impatient call from a chum in Paris who wondered why nobody was watching France and even less talking about it. Well, Greece and Spain – and to a lesser extent Portugal – have been keeping the flies off the bride.

Anyhow, let’s face it, a country where the stock market is up over 8% year to date and where the 10 year bond spread to Germany is 75bps can’t be all bad. In fact, the average 10yr OAT/Bund spread over the past 12 months is 108bps so current levels must be conveying more good news than bad….mustn’t they?

The unshakable axis between Paris and Berlin has been ruptured and France is waking up to find itself on the side of the PIIGS and not aligned with the core of Germany, Holland and Finland.

In reality, the French situation is deteriorating rather than improving. In fact, just when the talk is of us getting close to the recession bottoming out and where the binoculars are focused on helping to find the green shoots of recovery, French economic metrics seem to be weakening at an accelerating pace.

I know that the argument is that unemployment is a lagging indicator and that, therefore, the total of jobseekers breaking above 3,000,000 for the first time since June 1999 could be read as yesterday’s news and that it is therefore nothing to be got hot under the collar about. I do beg to differ. This rise in unemployment is in all probability structural and not cyclical.

What’s in the numbers?

Alas, I do have one problem. Although we laugh about the fiction of Greek economic stats and although I am pretty certain that numbers are massaged wherever you go, I have a particular scepticism with respect to some of the figures which come out of the Trésor. Do I have any proof that the French national accounts are any more made up than anyone else’s? Of course I don’t. But the “5-4-3” programme of melding the deficit to fit the Maastricht criteria between 1996 and 1998 already had me worried. There is a solid strand of belief in French political culture that perception is reality, of the supremacy of idealism over pragmatism. If you want it hard enough and for long enough, you will get it.

For the first fifty years of the progression towards European union, the French did the dreaming and the Germans picked up the bill. It was a cool division of labour. However, the Eurozone crisis has brought on a previously unknown and, in Paris, unexpected assertiveness on the part of the “Boche”. The unshakable axis between Paris and Berlin has been ruptured and France is waking up to find itself on the side of the PIIGS and not aligned with the core of Germany, Holland and Finland. President Hollande is finding that his grand rhetoric of how to spend one’s way out of debt is cutting no ice whatsoever with Mutti Merkel who has, although diplomatic language would never permit this to be said, firmly slammed the door in his face. The message is quite clear “…spend away, mate, but not with my money…..”

All the while, French industrial production is falling and has done, with a tiny one month blip into positive territory in April, since December last year. Likewise, the Manufacturing PMI has not been above 50 (again with a blip to exactly 50 in February) since July 2011.

Now, I hear you say, you were in France on holiday in the summer and there was no sign at all of things not going well but the same could be said of Greece – I was there myself, as I was in Italy – and of Spain too. The economic crisis is harder to see now than it was in the past when one drove through the industrial waste land and past the ruins of the Lorraine or Nord-Pas de Calais.

France is not looking clever and if this current wobble is going to turn into the next down-leg in the eurozone crisis, then I would be very wary of standing in the way of a loss of faith in French debt. France has offered an alternative to low yielding Germany and as such has attracted much of the cash which fled Spain and Italy since the Spring. I don’t like the prices where they are and remain a seller of French financial assets against the core.

Sell France against the core? Now there’s something we never thought we’d be saying and, more to the point, nor did President Hollande and his merry band of tax and spenders. He might do better, rather than rushing off to Berlin, contemplating a trip to visit the Rt Hon Invisible Member for Kirkcaldy and Cowdenbeath in order to be reminded what happens when fiscal reality is suspended in pursuit of ideological dreams. He might find out that if it fails during a boom, then it has a snowball in hell’s chance during a recession.

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