Best of the Week
Most Popular
1.Stock Market Continues Defying Gravity, Dow New All Time High - Nadeem_Walayat
2.America Superpower 2016 - Ian Bremmer
3.The US Dollar and the Precious Metals Complex - Rambus_Chartology
4.UK Immigration Crisis Could Prompt BREXIT, Propelling Britain Out of EU Despite German Factor - Nadeem_Walayat
5.The “Real Flash Crash” Will Scare You to Death - Shah Gilani
6.Gold Price Trend Forecast - Bob_Louka
7.UK Deflation Warning - Bank of England Economic Propaganda to Print and Inflate Debt - Nadeem_Walayat
8.Gold Lifeboat to Global Economies “Titanic Problem” Warn HSBC - GoldCore
9.Will Interest Rates Ever Rise? - BATR
10.Who’s Killing the Stock Market? - Shah Gilani
Last 5 days
Stock Market Choppy Uptrend May Have Topped - 30th May 15
Options Pricing - Covert Gamma, Portfolio Insurance, and STDs - 30th May 15
U.S. Crude Oil Production Sets New Modern Record - 30th May 15
Gold Still Waiting - 30th May 15
Investing’s Great Struggle - 29th May 15
How Rich Countries Get Rich - Freedom, Global Poverty, and the Failure of Foreign Aid - 29th May 15
Goldman Sachs Warns “Too Much Debt” Threatens World Economy - 29th May 15
Skunk Works Engineers Supersonic Profits - 29th May 15
Gold, Silver and US Dollar Strength - 29th May 15
This New Currency Could Wipe Out the Euro - 28th May 15
US Housing Market - Something Smells Fishy - 28th May 15
US Economy – Semi b2b Amps Up its Trend - 28th May 15
U.S. Fed Exported QE Travesty: Meet The BLICS Nations - 28th May 15
World War D—Deflation - Secular Bear Markets Analysis - 28th May 15
George Soros Warns of “Third World War” - 28th May 15
Why You Shouldn't Try to Invest Like Warren Buffett - 28th May 15
Stock Markets Buy and Hold is Back! - 28th May 15
We're Now Frighteningly Vulnerable to a Bond Market Crash - 28th May 15
Austerity, Economics and Religion - 28th May 15
National Holidays London and the Magic of Legoland UK Review - 27th May 15
Imminent Stocks Bear Market Signaled by Dow Theory ... - 27th May 15
Gold Price Has Bottomed – More Evidence - 27th May 15
Three Reasons You Shouldn’t Try to Invest Like Warren Buffett - 27th May 15
Gold Is “100% Guarantee from Legal and Political Risks” States Russian Central Bank - 27th May 15
Don't Drown in the Sea of Global Debt - 27th May 15
Three Reasons Why Carl Icahn Is Wrong About Apple Stock - 27th May 15
Crude Oil Price Stochastic Signals - 26th May 15
Why the Stock Market Will Crash - 26th May 15
GDP, Inflation, Employment Economic Statistics: It’s All a Lie - 26th May 15
Introduction to Peak Food - 26th May 15
Should We Dump the Euro? - 26th May 15
A Geopolitical Net Assessment of Europe - 26th May 15
Stock Market Top in Place? - 26th May 15
Best Cash ISA SBI 2.3% - 2.8 Year Fix, UK Interest Rates 2016 - 26th May 15
China Sets Up Gold Bullion Fund For Central Banks - 25th May 15
Is The Silver Trade Getting Crowded? - 25th May 15
Money Murder Mystery: Who Killed the Stock Market? - 25th May 15
Why Do We Celebrate Rising U.S. House Prices? - 24th May 15
Mario Draghi’s Slippery Downward Slope - 24th May 15
Gold : Truth is Stranger than Fiction - 24th May 15
Facebook Stock Price Forecast - 24th May 15
Make a Killing on the Coming Energy "Debt Bubble" - 24th May 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Biggest Debt Bomb in History

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

© 2005-2015 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

Biggest Debt Bomb in History