What do you think of when you think of France? Stunning sunlit countryside, charming villages of wood and stone and manna from heaven for the world’s gourmands?
All of this, happily, is true. Yet another side to France also sits in the public imagination. Industrial strife, the 35-hour week, people often out on the streets. An economy possessed of notable engineering, technical and design talent that just never quite seems to get off the ground.
Unfortunately, the dreaded bond markets we hear so much about these days seem to have this second picture more in mind. The extra cost that the French government has to pay to borrow compared with the German government has spiked to the highest level since the depths of the Eurozone crisis in 2012.
Why is this occurring, and what is the risk to investors? Let’s take the first one first. France is caught in a fiendish vice. The government has borrowed more than 5% of national income every year but one in the decade so far. For context, EU member states are meant to keep borrowing below 3%, with anything above that considered “excessive”.
Yet the centrist government faces extreme resistance to spending cuts and tax rises in France’s parliament, where it only controls around one-third of the seats. A left-wing bloc and a right-wing bloc each also control around a third and both are opposed to austerity measures.
Nor is the problem only among politicians. There is fierce resistance to cuts among much of the French public, who are already unhappy in the face of falling living standards and high fuel taxes. Just in the past few days, serious youth protests against education ‘underfunding’ have seen hundreds of France’s schools affected, with many even fully or partially closed due to the risk of violence.
Lenders to the government are only too aware of all this. Also on their collective radar is the possible outcome of next year’s presidential election. Opinion polls and prediction markets have the right-wing populist Marine Le Pen down as the most likely (though by no means certain) victor. Rather astonishingly, her platform includes reducing the age at which one can claim France’s state pension back down to 62.
Still, there is no need for undue concern. While a large borrower, France still accounts for only around 5% of the global government bond market, and only around half that proportion of the global stock market. So a well-diversified portfolio should have limited exposure, should conditions worsen. What’s more, the European Central Bank has in the past proved itself willing to ‘flex’ the single currency zone’s rigid rules as far as possible to avoid disaster – as with the Greek and Italian crises of the 2010s.
It is certainly worth keeping an eye on the situation. Still, keep in mind that times of economic or market trouble always seem serious in the moment – but often fade into memory against the power of the average company to keep growing its profits over the long term, even in the face of myriad challenges.
So, whether a magnum of Champagne’s finest, or a bottle of Blue Nun stuffed in the boot on a booze cruise to Calais, better to keep calm and raise a glass to our Continental cousins instead.
