France Is Europe's New Troublemaker Poster Child
Summary
- When it comes to budget and deficit negotiations, Italy took the center stage during most of 2018.
- However, now that Italy is climbing off the tree, France is climbing on the Concorde, and the latter is taller than the former.
- Germany, being the nation it is, is letting everybody play, and at the end - they usually win.
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Now that Italy (EWI) seems to be climbing off the "running a large deficit" tree it climbed on, there's a sigh of relief across Europe (VGK, EZU, HEDJ, FEZ) that can be heard on the other side of the Atlantic ocean.
However, many seem to forget that as one problem might be nearing an end, another, much bigger problem is upon us.
Rest assured that there's never a dull moment in Eurozone politics, so even if Italy starts behaving, another country will be stepping in soon enough, instead. France (EWQ) certainly looks like the new "trouble-making poster child" of the Eurozone, thanks to the "yellow vests" (wild, out of control) demonstrations.
These demonstrations caused French President Macron to make a U-turn. He has not only cancelled the intended spending cuts, but now promised to throw more money in favor of easing the burden on citizens. Sounds familiar?
As a result of the sudden "generosity", the French budget is expected to blow out. The 3.5% budget deficit proposal is certain to overshoot the European Union's budget deficit ceiling next year.
Did Macron make France the second Italy in the Eurozone? Well, truth must be told: France was, and remains, the first... France in the Eurozone.
Since 1993, Italy has pursued a more solid fiscal policy than France when measured by primary budget balance.
Italy, which (as a reminder) submitted a deficit of (now, we can add - only) 2.4% of GDP, is already asking/demanding for disciplinary measures.
As such, it's no wonder to see the French 10-year government bonds doing exactly what Italy government bonds did during the couple of months leading to December.
As French borrowing costs surge on Macron wage rises and tax cuts, the country's risk premium also jumps. France 10-year spread over Germany (EWG) widens to the highest level since 2017.
Below, you can see France's budget history. Guess what? They run a budget deficit larger than 3% of GDP in 9 out of the last 10 years, and the average deficit is 3.8% of GDP. How about that for Eurozone's second largest economy?
The 2018 deficit is estimated to be 2.6% of GDP, and the proposed 2019 deficit is expected to be 3.4%-3.5% of GDP.
In case you wonder, Italy's budget deficit was over 3% of GDP in 3 out of the last 10 years (versus France 9 out of 10, remember?)
2018 deficit is estimated to be 2.6% of GDP.
Average deficit across the entire period is 3.4% (versus France's 3.8%).
Nonetheless, Italy's debt-to-GDP level is over 130%, while France's is only 96%.
And then, there's Germany...
It realized a budget deficit greater than 3% of GDP in just 2 times over the last 10 years. It also recorded a budget surplus in each of the last four years.
The average deficit, including a big one-off in 1995, is only 2% of GDP.
So, when people ask/suggest that perhaps Germany should consider the Eurozone, they need to remember that Germany is actually the biggest winner of them all out of the Eurozone.
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