Could France succeed where Detroit has failed?
posted at 8:41 pm on July 23, 2013 by Erika Johnsen
Hmm. Does any of this sound at all familiar?
President Francois Hollande may only manage a lightweight reform of France’s indebted pension system, with trade unions preparing street protests and his own Socialist Party warning it would oppose painful measures.
Fellow Europeans say France risks damaging its own standing and that of the euro zone among investors, and upsetting southern members struggling with harsh reforms, if it fails to address the deficit in its pension funding.
But left-wing lawmakers are determined to prevent any erosion in the old-age provision enjoyed by the French. …
Yet the fact that pensions are almost entirely borne by the state means public spending on pensions is 14.4 per cent of output versus 12.9 per cent in the EU.
The pension pot has been depleted by rising unemployment and without reform, the funding gap will balloon from 14 billion euros (HK$143 billion) currently to 20 billion euros by 2020.
Much like the recently and officially bankrupt city of Detroit, France and its explicitly Socialist leadership are struggling to find a way out from underneath the crushing fiscal burden of much too much government spending and extravagantly underfunded pensions, and their politics are largely dominated by ultra-liberals and big labor to the degree that putting the country on the long-term path to fiscal sustainability isn’t really on the radar. Hollande’s big goal at the moment is to push through just enough reform so that they won’t have to address the problem again until 2020… but what happens after that? And what about all of the additional debt they’ll be wracking up in the interval?
I’m not saying that France is on the immediate edge of financial disaster — they are the eurozone’s second-largest economy, and have a lot more resources at their disposal (although they did just have their credit rating downgraded) — but they do seem to be determinedly marching in that direction. In the meantime, however, it sounds like Detroit’s bankruptcy hit a little too close to home in France; within hour after Detroit declared bankruptcy, French TV and other media were offering reassurances that such a thing could never, never happen in France, via Reuters:
Under French law, municipalities are required to balance their budgets, and the national government can — and occasionally does — intervene to force them to comply.
But take a closer a look at what’s been happening since the 2007 financial crisis, and a rather more nuanced, and surprising, picture emerges. For more than a dozen sizable towns and districts across France have been caught in a vicious debt trap that has seriously imperiled their financial well-being. In turn, they have mounted a furious counterattack that involves suing the banks that financed their credits. At the same time, they have launched an intense lobbying of national government for substantive help to shore up their finances. …
The national government has thrown a lifeline to the troubled communities, unveiling an arsenal of new measures — including about $4 billion in extra cash — to help assuage the crisis. And, to their delight, the local authorities have won landmark judgments against the banks that call into question the very validity of the loans they took out.