Why Wasn't France Downgraded Sooner?

The immediate reason for France’s downgrading by Standard & Poor’s (from AAA to AA+) may have been hubris, as Tim Worstall suggested in Forbes magazine. Last autumn, President Nicolas Sarkozy embarked on an overall emergency plan to salvage both the collapsing economies of Southern Europe and the euro as a currency. It entailed — among other things — French guarantees to the European Financial Stability Facility (EFSF), a newly established fund that will take care of EU countries sovereign debts. A noble gesture, no doubt dictated, in Sarkozy’s case, by the need to appear, within months of a difficult reelection bid, as a great world-size statesman. But a deadly one. In practical terms, France burdened itself overnight with massive toxic loans — or the equivalent of toxic loans — that it was hitherto not answerable for, and that will probably never be recovered at full value. Its own sovereign debt ipso facto rose and reached a ceiling. And its credit shrank.


The deeper reason for France’s downgrading, however, is simply that France has been broke for years. And the real question is: Why has it taken so long for S & P and others to take good note of it ? After all, it is an open secret.

Back in the early 2000s, a whole school of influential French whistleblowers – known as the declinists — warned the nation and the decision-making elite around the world about the sore state of affairs. There was Nicolas Baverez, whose La France qui tombe (Falling France) was published in 2003. Or Jacques Marseille, whose Le Grand Gaspillage (The Great Wastewas published the same year, and who went on with several other books. Or Michel Godet, who pointed in Le Choc de 2006 (The Shock of 2006,) to the extravagant price the country paid for its comprehensive welfare state. Not to forget Claude Allègre, a noted academic and a former minister of education in a Socialist cabinet, or Louis Chauvel, a young professor at the Paris Institute of Political Studies (now a visiting professor at Columbia).

Drawing from their works and similar sources, I wrote in “Can France Be Saved ?”, an essay that was published in the May 2007 issue of Commentary:

The public debt grew from the present-day equivalent of 213 billion euros in 1978 to 454 billion in 1990. It then jumped to 740 billion in 1995, and grew again to 1.2 trillion by the end of last year. … But what is called public debt in France is less than half of what would be listed under that heading in countries like the United States or Canada. The category does not include the retirement funds for the civil service (between 800 billion and a trillion euros), the national-health-service deficit, or various private debts (like that of Crédit Lyonnais) taken over by the state. … Marseille warns that it may double over the next fifteen years. This is on the scale of the debt of the Ottoman empire in the late 19th century.


As I said, an open secret.

One of the reasons for Sarkozy’s election in 2007 was that he was expected to take France’s national debt seriously. One of the reasons for his subsequent fall of grace is that, here like on many other issues, he was not able to deliver. The debt, as measured by the conservative French criteria, grew at a 100 billion/year pace during his five years mandate and is now over 1.7 trillion, while the GDP almost froze. If things are allowed to go on like that, it would — hypothetically — reach a staggering 2.7 trillion in 2022, against a low growth GDP of 2.2 or 2.3 trillion. Marseille’s dark prophecy will then be fulfilled. Again, anybody with a brain was aware of that. Still, both the French political leadership and the world financial elite (including the notation firms) seemed to take the country’s triple A rating for granted. How so?

Policies are rooted in culture, history, idiosyncrasies. Historically, the French are a predominantly continental, military, Statist nation, whereas their Northern or transatlantic rivals (the Dutch, the Brits, the Americans) are predominantly oceanic, commercial, and free -enterprise oriented. As Statists, the French take the epithet sovereign more seriously than the noun debt. They may assess their debt, and nevertheless see it more a partnership of some sort than a liability. All they will insist for is the world market of finance to be disciplined, or regulated, to that effect. While the oceanic nations (and their late 20th century converts, the Germans) think that a debt is to be repaid in one way or the other, either by legal and contractual agreements or — beyond regulatory niceties — by the naked requirements of economic life.


However, even oceanic nations resort to credit laxity and public debt practices for extended periods of time. In fact, they do it even more easily than Statist nations, since they know that some reckoning will be exacted from them at some point; they let their Obamas borrow since their Tea Parties are watching. What happened in the case of France was that its own idiosyncratic habit of public spending and public borrowing coincided with a very lengthy period of oceanic indulgence in these matters. Even the Germans could not lecture their French friends for about twenty years, because of their own public overborrowing on behalf of the former Communist GDR.

The tragedy of Nicolas Sarkozy is that he did not grasp that it was just a coincidence. An America that has itself been degraded from AAA even before France is not going to grant much help any more. As for Germany, it managed to restore its economy in an impressive way, and thus to restore its credit. And Chancelor Angela Merkel, who will be facing elections in 2012 or 2013, will not be popular unless she jealously defends German interests only. Two excellent reasons not to support France too much.


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