Don’t Lend Your Money To The French

By The Noble Contrarian on November 18, 2010 in Other

He may have a hot missus but don't trust him with your cash.

Don’t get me wrong, I’m all for free education. And, if you can get away with it, why not spend a few years drinking beer at the government’s expense? I appreciate the nice, warm, fuzzy feeling of socialism. And I understand why most people want to work the minimum hours possible. Personally, I like my work (if you can call it that), I do a lot of it and I doubt I’ll ever stop, but I still understand the whole retirement thing.

Where the French and I diverge, though, is that I recognise that someone, somewhere, one day, has to pay for all the time people aren’t working.

Millions of French protesters took to the Paris boulevards recently, outraged at the government’s attempts to raise the retirement age from – wait for it – 60 to 62.

When the average life expectancy was 65, a retirement age of 60 made some sense. Now life expectancy is 80. And most young Europeans see it as their divine right to study, for free, until they are 30. In fact, half the people reading this magazine are probably doing so while lying on Bondi Beach at their government’s expense.

That leaves the French 30 years of work out of 80 years of life (35 hours a week, mind you). It’s farcical and yet, when the government tries to change it by a relatively minor two years, the population brings the country to a standstill.

Watching the riots unfold hammered home the reality that it’s going to be almost impossible to make the structural changes required to enable France to repay its growing debts. Granted, it has nothing on Greece, but debt is already 80% of GDP and, with an ageing population, it is only headed in one direction.

Carmen Reinhart and Kenneth Rogoff, authors of This Time Is Different: Eight Centuries Of Financial Folly, go to some lengths to point out that most sovereign defaults don’t occur because a country can’t pay. They occur because a country’s leaders choose not to repay the debts. The vast majority of sovereign defaults (there have been hundreds, including several by France in the 18th century) have occurred with debt to income ratios of less than 60%.

History has shown that when the political costs of forcing fiscal adjustment on a country’s people are greater than the financial costs of defaulting, politicians will choose to default (or ‘restructure’ in modern language).

Mathematically it’s not the slightest problem for France to meet its obligations. All it requires is a relatively minor adjustment to the trajectory of its occupants’ standard of living over the next 100 years. Whether its constituents are prepared to make the necessary sacrifices is an altogether different question.

The country, along with most of its European neighbours, needs much bigger changes than a two-year increase in the retirement age to meet its future obligations. Doing so is going to be a battle between politics and finances. The images of the past week are a timely reminder of a lesson repeated many times throughout history: it’s usually the politics that wins.