Best of the Week
Most Popular
1.BrExit House Prices Crash, Flat or Rally? UK Housing Market Affordability Crisis - Nadeem_Walayat
2.Stocks Bull Market Climbs Wall of Worry, Bubble? When Will it End? - Nadeem_Walayat
3.Gold Price Is Now On Its Way To All-Time Highs - Hubert_Moolman
4.Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - Harry_Dent
5.UK interest Rate PANIC CUT! As Banks Prepare to Steal Customer Deposits - Nadeem_Walayat
6.Gold and Silver Bull Phase 1 : Final Impulse Dead Ahead - Plunger
7.Central Bankers Fighting An Unprecedented Global Economic Slowdown - Gordon_T_Long
8.Putin Hacking Hillary for Trump, Russia's Manchurian Candidate? - Nadeem_Walayat
9.Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - Chris_Vermeulen
10.Gold Sector - Is it time to Back up the Truck? – Mortgage the Farm? - Peter_Degraaf
Free Silver
Last 7 days
Why Putin Might Be on His Way Out - 25th Aug 16
Bond Guru Gary Shilling - The Bond Market Rally of a Lifetime - 25th Aug 16
A Zombie Financial System, Black Swans and a Gold Share Correction - 25th Aug 16
OPEC’s Output Freeze: What Has Changed Since Doha? - 25th Aug 16
Merkel Prepares For a Deliberate Crisis While White House Plans For a Disastrous Succession - 24th Aug 16
Suspicious Reversal in Gold Price - 23rd Aug 16
If Trump Can’t Pull Off a Victory, Expect a Civil War - 23rd Aug 16
Ceding ICANN and Internet Control to Globalists - 23rd Aug 16
How to Spot an Oversold Stock Market - 23rd Aug 16
Gerald Celente Sees Worst Market Crash, New Military Conflict, Gold Spike to $2,000/oz - 23rd Aug 16
EU Olympics Medals Table Propaganda Includes BrExit Britain - 22nd Aug 16
BrExit Win's Britain Olympics Success Freedom Dividend, Economy Next - 22nd Aug 16
Stock Market Top Forming, but Slowly - 22nd Aug 16
(Really) Alternative Banking Systems - 22nd Aug 16
Vauxhall Zafira Fires - Second Recall Issued - Inspection Before Bursting into Flames? - 21st Aug 16
Will the Stock Market Bubble Pop Regardless if the FED Never Raises Rates? - 21st Aug 16
US Government Spending - 3 Big Stories Not Being Covered – Part III - 21st Aug 16
Silver Analysis - 20th Aug 16
SPX New Highs, Correction Next? - 20th Aug 16
Housing Bubble - The Marginal Buyer Holds The Pin That Pops Every Asset Bubble - 20th Aug 16
Gold Miners Q2 2016 Fundamentals - 19th Aug 16
Which Price Ratio Matters Most in a Fiat Ponzi? - 19th Aug 16
Big Policies, Bigger Failures - 19th Aug 16
Higher Crude Oil’s Prices and USD/CAD - 19th Aug 16
Here’s Why You Should Look for Dividend Stocks and How - 19th Aug 16
Deglobalization Already Underway — 4 Technologies That Will Speed It Up - 19th Aug 16
These 6 Charts Show Why the Average American Is Fed Up - 18th Aug 16
SPX Easing Lower - 18th Aug 16
Low / Negative Interst Rate’s Legacy - 18th Aug 16
The 45th Anniversary of The Most Destructive Event In Modern Monetary History - 18th Aug 16
USDU - An Important Perspective on the US Dollar - 17th Aug 16
SPX Completes Wave 1 Decline - 17th Aug 16
How to Quickly Spot Common Fibonacci Ratios on a Chart - 17th Aug 16
When Does a Forecast Become a Trade? - 17th Aug 16
Kondratiev Wave - The Financial Winter Is Nearing! - 17th Aug 16
Learn "The 4 Best Elliott Waves to Trade -- and How to Trade Them" - 16th Aug 16
Stock Market Bears Turning Bullish At New All Time Highs - Time to Get Worried? - 15th Aug 16
Job Seekers Sacrificed to the Inflation Gods - 15th Aug 16
A Look At Commodities and Financial Markets Trading Week Ahead - 15th Aug 16
Stock Market New Top Forming? - 15th Aug 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

How to Trade Elliott Waves

France May be the Domino that Causes the Euro to Collapse

Currencies / Eurozone Debt Crisis Apr 18, 2012 - 06:21 AM GMT

By: Money_Morning

Currencies

Best Financial Markets Analysis ArticleMartin Hutchinson writes: Commentators are wringing their hands again, worried the troubles in Spain could cause the whole euro project to collapse.

As a result, all eyes are now on Spanish 10-year debt yields, which went above 6% last week as the threat of euro-chaos returned.

But it's not Spain the markets should be worried about.


The reality is that Spain is not in too bad a shape and that a rescue would be affordable for the European Central Bank even if it was needed.

The real tottering European domino to worry about is France.

After all, it would be impossible for the remaining solvent members of the EU to bail out France if it began to fall.

The larger reality is that France's fiscal position is considerably worse than Spain's.

The country's debt-to-GDP ratio was 85% at the end of 2011, while Spain's was only 66%. What's more, France's public spending is 56% of GDP, according to the Heritage Foundation, compared to Spain's 45% of GDP.

Spain's current government has also instituted a stiff austerity program, mostly comprised of cuts in public spending, which will reduce its deficit below France's by 2013.

Meanwhile, France's austerity has so far consisted almost entirely of tax increases on the rich -not actual spending cuts.

Spending cuts, especially from governments which are overspending, may well stimulate GDP because they free resources for the more productive private sector, whereas tax increases generally worsen recession.

French Elections Hold the Key to the Euro
Whether or not France brings down the euro hinges on the outcome of its upcoming presidential election, set for two rounds April 22 and May 6.

France's current position is very confused, to say the least. No fewer than five candidates have a chance to make it into the two-candidate runoff.

The incumbent, Nicolas Sarkozy, is currently running slightly behind the mainstream socialist Francois Hollande, but three other candidates potentially could knock one or the other of the front-runners out of the second round.

They are Marine LePen, a nationalist; Francois Bayrou, a moderate; and Jean-Luc Melanchon, an extreme leftist.

Presumably if any of those three made it to the second round, they would be beaten by the remaining major party candidate, as was LePen's father by Jacques Chirac in 2002.

But it has to be said that electoral prognostication is exceptionally difficult.

If Sarkozy or Bayrou win, nothing much changes; France remains committed to the current consensus Eurozone policies and the Eurozone probably "muddles through."

But if one of the other three wins, there is going to be a big problem for the European Union (EU).

LePen would be anathema to the EU leadership, so even if she committed to continue austere fiscal policies, the markets would probably react badly.

As for a Hollande or Melanchon victory, the commitment to government austerity is just not there. In the current nervous state of the markets, France's budget deficit could become impossible to finance.

Hollande, for example, wants to reverse Sarkozy's earlier raising of France's pension age, while also pushing the top income tax rate to 75%.

An election win by Hollande or (very unlikely) Melanchon would simultaneously weaken the credibility of France's own austerity program and weaken the Eurozone coalition that has imposed austerity on Greece, Portugal, Ireland, Italy and Spain.

That would almost certainly cause markets to attack French government bonds, as well as stepping up the attack on Spanish, and probably Italian, government bonds.

The reality is that a France managed by an anti-austerity leftist, even a moderate one, is simply too far from Germany and Scandinavia in its fiscal management and economic outlook to remain part of the same currency zone.

And even if Germany and Scandinavia wanted France to remain part of the euro, they don't have the resources to bail France out.

Hence a Hollande victory at France's election May 6--currently believed to be at least a 50-50 probability--would almost certainly mean the end of the struggle to hold the euro together, and its collapse in failure.

Questions About France, Italy, Spain and the Euro
France, Italy and Spain - unlike Greece - do have ample resources with which to support their government bond markets, provided they control their own currencies.

Since most of their obligations are denominated in euros, their debt/GDP ratios would rise, but probably only by 15-20% since a devaluation of that level would be sufficient to make them export powerhouses.

Thus in principle a break-up of the euro need not lead to a world banking collapse, since the value of French, Spanish and Italian government debt would remain solid.

However, all three countries would have questions about their future.

In France's case, the commitment of the new government to controlling public spending would be questionable.

In Spain, the current government's position would be weakened. What's more, there would be a further round of banking trouble, as home mortgages denominated in euros would be secured only against houses valued in new pesetas.

In Italy, the Monti government, imposed by the EU, would doubtless fall, bringing political uncertainty and further aggression by the country's powerful unions.

And even if everything turned out to be okay in the end (except in Greece) the uncertainty would roil world markets, including in the United States.

For investors, that means it may pay to keep our heads down until the French election results are known.

While everybody is watching Spain, it is France that could topple.

Source :http://moneymorning.com/2012/04/18/france-may-be-domino-that-causes-euro-to-collapse/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife