Maybe the euro debt crisis is really a developed economy demographic crisis
08/12/2011 12:30 pm EST
When I arrived in Italy about a week ago now, the crisis narrative was all about contagion—Would Italy and Spain catch the Greek disease? With the U.S. debt downgrade and the plunge in global stock markets, the headlines shifted. Corriere della Serra, for example, blared, “Obama fails to stop market rout” in Italian, of course.
And then in the last few days the focus has shifted again. Now the worry is France, and some Europeans are starting to say that even the strongest EuroZone economies have a debt problem.
The near panic this week over the stability of French banks with their massive exposure to sovereign debt from Greece, Spain, and Italy produced the latest turn in the story. From there it was a short jump to worries about French deficits and government debt and investors got a boost across that narrow gap when data released by Paris showed that the French economy had stalled in the second quarter with GDP flat with the first quarter. Economists quickly broke out their spreadsheets and calculated that President Nicolas Sarkozy’s deficit reduction plan for 2011 depended on 2% economic growth in France. French government debt is still low by Greek or Italian standards but it has been on a steep upward climb in the last few years from 64% of GDP in 2007 to 82% today.
In the derivatives market the premium on a credit default swap against a French government default has doubled in the last six weeks. And the yield spread for French 10-year bonds against the German bund, the benchmark bond in Europe, climbed to a record since the start of the joint currency.
All this might not be getting quite as much attention except for the Standard & Poor’s downgrade of the U.S. debt rating to AA from AAA. France is still AAA, but investors have started to fret that the French credit rating might be in jeopardy too.
After all, the French government has built a solid record of rhetorically recognizing the deficit problem and the need to do something about it—and then delivering plans that fell short of addressing the problem. And French politics aren’t markedly less dysfunctional than those in the United States at the moment with sitting President Sarkozy facing an April 2012 election that could well force him into a run-off against the extreme right National Front and its leader Marine Le Pen.
Looking at the numbers and the politics, it’s not clear why France, the second largest economy in Europe should be AAA if the United States is just AA.
Once you start down that road, however, you quickly realize that the problem isn’t just that Greece and Portugal are uncompetitive economies, or that Ireland and Spain are suffering the pains of a spectacular real-estate boom and bust, but that none of the world’s developed economies have put aside enough money during boom times to take care of the absolutely predictable costs of aging populations.
If that’s the real problem, then, yes France’s AAA is at risk. And so is the United Kingdom’s. And maybe even Germany’s.
And oddly enough, if that’s the real problem, then the United States, which is aging less quickly than any of the EuroZone economies, deserves a higher credit rating than any of them. (Which is not the same as saying that the United States deserves an AAA.)
See travel does broaden the mind.
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