The Moochers and Looters in France Are Running Out of Victims

The late, great Margaret Thatcher famously said that “Socialist governments…always run out of other people’s money” and “I love the smell of napalm in the morning” is an iconic line from Apocalypse Now.

Thinking about the fiscal mess in Europe, I’m going to combine these two sentiments and state that, “I love it when statists run out of victims and start cannibalizing each other.”

And that’s about to happen in France.

The burden of government spending is enormous, with the public sector consuming 57 percent of economic output.

That’s more than either Greece or Sweden!

If something isn’t done, France will suffer a Greek-style crisis as investors lose trust in the government’s ability to pay its bills.

The situation is so bad that even the country’s Socialist President claims that he plans to cut spending, but he faces a revolt in his own party from those who refuse to recognize reality. Here are some excerpts from a column in the UK-based Telegraph.

President Francois Hollande has already angered much of his own Socialist base with plans to cut spending next year in absolute terms for the first time since 1958, but this may be just start of the battle. The Cour des Comptes said France is not even “halfway” through its fiscal squeeze. …”France is drifting away. Like a receeding wave, it is retreating little by little from the global economy, imperceptibly in the past, but visibly so today,” said Jean-Pierre Letartre, Ernst & Young’s chief in France. …The government has pencilled in economic contraction of 0.3pc this year, with a weak recovery starting in the second half, but a chorus of private economists fear far worse if there is any outside shock. “It could be as much as minus 1.5pc,” said Jean-Michel Six from Standard & Poor’s. …Mr Hollande has so far gone along with EU austerity demands, backing away from his pledge for a New Deal growth strategy in the elections last year. But his poll ratings have crashed at the fastest rate ever for a new president, and much of his own party is near revolt.

I’ll be surprised if France actually follows through with genuine spending cuts, but you can see from this chart that the time for fiscal restraint is long overdue.

To be somewhat optimistic, it’s worth noting that governments will do the right thing when there’s no other alternative.

Greece, for instance, has cut spending three years in a row, bringing the budget down from 124 billion euro in 2009 to 106 billion euro last year. Unfortunately, there have also been big tax hikes, and the overall level of spending is still about where it was in 2007, so Greece is far from a role model. But at least the era of ever-rising outlays has ended.

And I’ve already pointed out that the Baltic nations are a role model since they made genuine spending cuts the moment the crisis began and they’re now enjoying an economic rebound.

I realize this will be the understatement of the year, but France is not going to be the new Estonia.

Unlike the Canadian Liberal Party or Australian Labor Party, it does not appear that the Socialist Party in France is willing to recognize reality and do the right thing.

But the good news is that they don’t have any room to raise taxes. Successful people already are leaving the country because of punitive tax rates, and I suspect even President Hollande privately understands that France is on the wrong side of the Laffer Curve.

So I expect there will be a fight. On one side, we’ll have the rational statists who recognize that spending cuts are needed to avoided a fiscal crisis. On the other side, we’ll have the irrational statists who blindly think more money can be squeezed from the rich with more class-warfare tax policy.

Let’s hope for heavy casualties on both sides.

P.S. There’s a lot to like about France, and I reported a few years ago that it was ranked as the top nation for good living. But that’s only if you already are rich. Now that the French national sport is taxation, productive people who want to become rich have a big incentive to go someplace else.

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Stop the Presses, Europe’s Doing the Right Thing on Failed Banks!

For my birthday last year, the only present I wanted was for the Supreme Court to uphold the Constitution and reject Obamacare.

Needless to say, that didn’t happen. Instead, the Chief Justice put politics above the law and made a mockery of his Oath of Office.

So I’m now a bit superstitious and I’m not going to write about anything I want today or in the future. But I will pretend that something good happened because it’s my birthday, so let’s celebrate the fact that the European Union has basically made the right decision on how to deal with insolvent banks.

Technically, it happened yesterday, the day before my birthday, but it’s being reported today, and that’s close enough for me. Here are some details from the EU Observer.

Bank shareholders and creditors will be first in line to suffer losses if their bank gets into difficulties, according to draft rules agreed by ministers in the early hours of Thursday morning… Under the new regime, banks’ creditors and shareholders would be the first to take losses. But if this proves insufficient to rescue the bank in question, savers holding uninsured deposits worth more than €100,000 would also take a hit.

This is basically the “FDIC-resolution” approach that I’ve mentioned before, and it’s sort of what happened in Cyprus (after the politicians tried every other option).

And it’s the opposite of the corrupt TARP system that the Bush and Obama Administrations imposed on the American people.

The reason this new European approach is good is that it puts the pressure for sound business decisions where it belongs – with the shareholders who own the bank and with the big creditors (such as bondholders) who should be responsible for monitoring the underlying safety and soundness of a bank before lending it money.

And rich people (depositors with more than €100,000) also should be smart enough to apply some due diligence before putting their money someplace.

The last people to bear any costs should be taxpayers. They don’t own the bank. They don’t invest in the bank. And they don’t have big bucks. So why should they bear the cost when the big-money people screw up?!? Especially when TARP-style bailouts promote moral hazard!

I’m sure the new system won’t be properly implemented, that there are some bad details in the fine print, and there will be too many opportunities for back-door bailouts and cronyism, but let’s not make the perfect the enemy of the good.

Happy Birthday to me. And such an unexpected present: Something good actually came out of Europe!

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