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Thursday, December 20, 2012 3:06 AM

France Faces Growing Pension Deficit; French Youth Lose Hope; Politicians in Denial; Bond Market Patience Can't Last

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With sovereign debt yields in most of Europe stabilizing, and the euro on the rise vs. the US dollar there is a growing sense of complacency in the eurozone. Such complacency is not warranted.

I sense another storm in Southern Europe and huge problems ahead for the core of Europe, including Germany and France. The focus of this article is France.

Young French Losing Hope as Prospects Fade

French president Francois Hollande has not delivered on his promise to create jobs so Young French Lose Hope as Prospects Fade.

Youth unemployment in France has been high for some time, but it has now climbed to 26 percent. For decades, regardless of their political affiliation, lawmakers have been promising to create a better situation for young people. But exactly the opposite has happened. Labor laws protect those who already enjoy steady jobs, while the economic crisis and recession have limited the number of new jobs created. Meanwhile, housing has become both scarcer and pricier.

Some 23 percent of the country's 18- to 24-year-olds live in poverty, according to a study by the National Institute for Youth and Community Education (INJEP). These are mainly high school or university dropouts who have little to no access to health care and limited chances of improving their situations.
Such is the folly of Hollande's Economically Insane Proposal: "Make Layoffs So Expensive For Companies That It's Not Worth It". If companies cannot fire workers, they will not hire them in the first place.

Coupled with foolish tax hikes on businesses and consumers alike, rising unemployment should be expected, and that's exactly what has happened. Businesses are upset, as well they should be, yet the politicians have not gotten the message that they are the problem.

Last week, Arnaud Montebourg, the French minister of industrial renewal, threatened steel giant ArcelorMittal, with "temporary nationalization" if Mittal shut down two furnaces, eliminating 630 people. Mittal employs 20,000.

Montebourg's inane proposal sent shock waves all the way up to the president's office.

French in Denial as Crisis Deepens

Spiegel reports French in Denial as Crisis Deepens
In the midst of the economic crisis, France's Socialists are denying reality. The minister of industrial renewal is calling for nationalization of some industries, while the president shies away from necessary structural reforms. Business leaders fear the clock has been turned back 30 years.

France's business leaders felt as if they had been set back 30 years, to a time when the first Socialist president of the Fifth Republic, François Mitterrand, began his term with a wave of nationalizations and, after two years, was forced to reverse his policy. Some even drew a comparison with 1945, when the government nationalized automaker Renault after accusing it of having collaborated with the enemy. Wasn't Montebourg, who had always been an eloquent preacher of deglobalization, dividing business owners into different camps, good and evil, patriotic and unpatriotic?

"Has the government forgotten that nationalization means expropriation?" asked Laurence Parisot, the appalled head of MEDEF, the employers' union.

The liberal economist Nicolas Baverez, who predicted "France's downfall" 10 years ago and has just written a book titled "Réveillez-Vous" ("Wake Up"), saw the wrangling over Florange as proof that the French left still hasn't accepted globalization, and acts as if the country were an economic and cultural preserve. "The idea of nationalization sends an ominous message to all investors," Baverez said.

Even Finance Minister Pierre Moscovici carefully distanced himself from Montebourg, saying: "Our policy differs from the past experiences of leftists in power."

But the workers at the Florange site and their unions were thrilled with Montebourg's threat. According to a snap poll, a majority of the French people and, in particular, leftist voters, appreciate such showdowns with the patrons, or business owners. It's no accident that France's young people see working in the public sector as the ideal professional career. The government promises protection and security.

A Plethora of Public Servants

"Whenever a new problem popped up in the last 25 years, our country reacted by increasing spending," says banker Michel Pébereau.

Public sector spending now accounts for almost 57 percent of GDP, more than in Sweden or Germany. For every 1,000 residents, there are 90 public servants (compared with only about 50 in Germany). The public sector employs 22 percent of all workers.

La douce France
is a sleepy country of bureaucrats and government officials who want their peace and quiet. But the bad news is beginning to pile up for Hollande.

There are many indications that time is running out for Hollande, that Prime Minister Ayrault's days could already be numbered, and that the valiant knight Montebourg, who had initially aspired to be Ayrault's successor, is more likely waging a tragic battle against the windmills of globalization.
France Faces Growing Pension Deficit

On top of a growing unemployment problem, a growing deficit problem, and a bloated
public sector France Faces Growing Pension Deficit.
France’s national pension system is sliding deeper into deficit despite bitterly contested reforms pushed through by Nicolas Sarkozy, former president, adding to the tough economic challenges facing François Hollande’s socialist government.

An official report published on Wednesday forecast the pension system deficit would rise to €18.8bn in 2017 from €14bn last year and would be likely to exceed €20bn in 2020. The annual cost of pension payments has risen to 14 per cent of gross domestic product.

The issue is a big headache for the government, already battling to reduce public debt rising above 90 per cent of GDP. It has run into strong opposition from business over its hefty increases in taxes and has yet to detail where the burden will fall from €60bn of spending curbs planned over the next five years.

Mr Hollande’s Socialist party opposed reforms enacted by Mr Sarkozy’s right-of-centre government in 2010 which raised the minimum retirement age to 62 from 60. Although relatively modest by the standard of reforms in other European countries, they provoked weeks of mass street protests led by trade unions

The scenarios set out by COR, the pensions’ council, showed that unemployment would have to be more than halved from its present level to 4.5 per cent and productivity growth increased to 1.8 per cent to bring the pension system back into surplus by 2060; if unemployment averaged 7 per cent and productivity growth 1.3 per cent, the deficit would widen to more than €60bn in the same period.
Bond Market Patience Can't Last

How long the bond market puts up with these problems is unknown, but it will not be forever. Indeed, I doubt bond market complacency with France lasts another year.

In the meantime, the odds of France doing something to address these problems is roughly zero percent. If anything, Hollande has shown a marked propensity to send France into reverse.

Mike "Mish" Shedlock

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