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French Current Account Deficit Drained EUR 4.2 Billion In July 2017 Out Of The Economy

Includes: EWQ
by: Alan Longbon
Alan Longbon
Macroeconomics, long/short equity, Deep Value, long-term horizon

French Current Account Deficit Widened To EUR 5.02 Billion In July 2017.

One can expect more growth in the French stock market given the fiscal space that has been created from positive fiscal flow rates.

Decelerating overall fiscal flow rates are a concern going forward.

The French have just released their current account data for July 2017. The purpose of this report is to place this new data in our fiscal flows national balance of accounts model to see what impact this data has on business going forward.

This report was produced using a balance of national accounts assessment of France

One can summarize the national accounts in the following formula:

Private Sector [P] = Government Sector [G] + External Sector [X]

And similarly:

GDP = Private Sector [P] + Government Sector [G] + External Sector [X]

See the methodology section below for more detail on these formulae.

Each sector will be examined in turn starting with the private sector.

Private Sector

The private sector is where the stock market is and we as investors want the stock market to go up. The stock market can only go up if the flows into it are positive. The private sector derives income from three sources:

  1. Credit creation from banks - More loans are created than are repaid.

  2. Externally from overseas commerce - More is exported than imported.

  3. Government spending - more is spent than taxed out.

In an ideal scenario, the private sector would receive large, and growing income flows from all three sources, and at the very least, the overall impact should be a positive flow overall even if one or two of the three flows are negative.

The stock market in the private sector, as well as all other private financial assets, should rise if the overall income flow into the private sector is positive. Certainly, the stock market would be unlikely to rise if the income flows were negative. Even in a shrinking economy, some sectors can grow while the rest of the pie shrinks.

The chart below shows the level of private credit creation entering the private sector through commercial banks.

Credit creation in 2016 was quite strong averaging over 3% for the year and making a similar contribution as a percentage of GDP.

It looks like loan creation peaked in April 2017 and had decelerated since the election of President Macron. Expectations in the community now are for Macron's stated program of more austerity, higher taxes, less government spending, labor "reforms" to dismantle unions and workers rights with the end goal of lowering overall employee earnings.

All these changes will lower aggregate demand and create more unemployment of land, labor, and capital. This is not a positive political and economic leadership picture going forward, and investors should bear this in mind.

External Sector

The external sector captures trade and commerce with other countries and is best captured by the current account. The current account is exports less imports, and it also captures capital flows in and out of the country from financial transactions and investments. A positive overall result is best.

The chart below shows the current account balance. The chart shows the current account is both negative and also reasonably small at less than 1% of GDP.

This is the new data we have and can add to our sector flow model and assess the impact going forward.

France is not a monetary currency sovereign; it is a user of the Euro. It is a matter of simple arithmetic that a country that borrows its currency and runs a net current account deficit will one day run out of money. The problem is that as the debt grows and solvency erodes money becomes too costly to borrow and bond market yields too high to sustain. At this point, the country must declare itself bankrupt and introduce a currency reform.

France is a signatory to the EU Fiscal Compact which sets the rules that a government deficit may not be more than 3% of GDP and not more than 60% of GDP. One size fits all.

The French governments only choice to "repay" its debt is to pay it by taxing the private sector surplus. The general public must run down their stocks of savings and assets and also go into private debt in order to provide the government with tax revenue with which to retire its debt at the central bank. There is no other mathematical solution. What is going on in the trade deficit nations of the Eurozone is one of the biggest wealth transfers to private banks that has ever occurred.

The leakage of funds to the external sector is relatively small at less than 1% of GDP, and so the mathematical end point for France's national finances is a long way off.

A bigger leakage is the government deficit at over 3% of GDP. This borrowed at interest from private banks and the European Central Bank.

Government Sector

The government budget is in the chart below.

The charts show the government adding to the private sector with deficit spending. The trend, despite three months of President Macron and his planned "reforms," is the same as for last year.

A good portion of government spending is automatic. When there are not enough jobs in the economy to provide full employment the welfare system steps up to provide income support when there is a job shortage. This is an automatic adjustment and not a policy decision to spend more or less, it simply happens, and is built into the legislation. If this were not the case, people would starve in the streets, and that is not an outcome worthy of an advanced nation.

General unemployment is 9.5%, and youth unemployment is 23.4% so there is a lot of idle labor the government could employ that the private sector has no use for. Capacity utilization is at 84.2% which means that 15.8% of Frances land and capital is out of production and standing idle. Real inflation cannot take place until this idle land, labor and capital capacity is used.

One sees in such a situation how financially restraining it is when a nation is not monetarily sovereign.

With both a current account deficit and a government deficit in a foreign currency (the Euro is a foreign currency if one is not the sovereign issuer) there is a net leakage of funds out of France, the largest part being the government deficit at over 3% of GDP.

At some stage in the future, France will face the discipline of the bond market and have to reform its currency. Greece shows how far this can go and we will see the sale of the public sector and hideous austerity long before the relief of a currency reform comes.

Sectoral Analysis Methodology

The sector analysis method was developed by British economist Mr. Wynne Godley.

Each nation state is composed of three essential components:

  1. The private sector

  2. The government sector

  3. The external sector

The private sector comprises the people, business and community, and most importantly, the stock market. For the stock market to move upwards, this sector needs to be growing. This sector by itself is an engine for growth and innovation; however, it only needs income from one or both of the other two sectors to grow.

The government through its Treasury also sets the prevailing interest rate and provides the medium of exchange. Too much is inflationary and too little is deflationary. It puts the oil in the economic engine and can put in as much as its target inflation rate allows. It is not financially constrained. For a sovereign government with a freely floating exchange rate, any financial constraint such as a matching bond issue is a self-imposed restriction. A debt ceiling is also a self-imposed restriction as is a fiscal brake.

The external sector is trade with other countries. This sector can provide income from a positive trade balance, or it can drain funds from a negative trade balance.

For the stock market in the private sector to prosper and keep moving upwards, income is required to be put into the flow. Otherwise, the sector can only circulate existing funds or is being drained of funds and is in decline.

The ideal situation is that the private sector has a net inflow of funds and is always growing, thus giving the stock market headroom within which to expand in value. For this to happen, one or both of the other sectors have to be adding funds to the circular flow of income.

The following formula can express this relationship:

Private Sector = Government Sector + External Sector


GDP = Private Sector + Government Sector + External Sector

These are accounting entities and correct by definition.

For the best investing outcome, one looks for countries with stock markets located in private sectors that are receiving positive income flows overall. Top marks come where private credit creation, the government sector, and external sector are all in plus and trending upwards.

Conclusion, Recommendation, and Summary

When we take our inputs and place them in our formula, we can calculate the following sectoral flow result based as a percentage of GDP.

Private Sector Credit Creation


Government Sector


External Sector





3.7% 3.4% -0.9% 6.2%






(Source: Trading Economics and Author calculations based on same)

One can see though that the government and private sectors do the heavy lifting while the external sector is a net drain on private sector wealth.

Fiscal flows, in general, are fairly large and positive and allow for financial assets in the private sector to increase in value. On the downside, the fiscal flows are decelerating, and the trend is worsening overall.

France is under new management that follows the standard neoliberal mantra of austerity, cuts, cuts and more cuts. Depress labor wages, privatize the public realm to make basic services more expensive, etc., etc. All the things that have been done since 2007 and have not worked.

France is on the wrong end of one of the largest transfers of public and private wealth to foreign bankers that have ever taken place.

Investors wishing exposure to France can participate via the ISHARES MSCI FRANCE ETF (EWQ). The fiscal flows are moderately strong, but there are better opportunities out there.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.