Why a new euro crisis is looming: ‘The calm in France is misleading’

Why are the financial markets so complacent?

Stalemate means: no policy, because if you don’t agree, you don’t implement policy and it doesn’t cost money. That’s why there is some optimism about stalemate in France. I understand that partly, because it’s not going to get any worse. But I think the days of “no policy is good policy” are over for France. The problems are so big that if nothing happens in the coming months – or, at worst, years – the problems will naturally increase. That’s only good news.

What kind of problems are we talking about?

Finances. Look, doing nothing actually means that all these plans to spend hundreds of billions of euros more will come to nothing. That’s why we’re so mildly optimistic. But doing nothing also means that France is doing nothing about its incredibly high budget deficit and its very high national debt, which continues to rise.

I have also said this in the past: whether the far-left, the left, the right, the far-right, or the center party wins, the likelihood of financial problems is the same. Because none of these parties have plans to do anything about the debt and the deficit, while they have plenty of plans to spend money. But this stagnation also means that nothing happens and the problems are not addressed. And we are already seeing the consequences of this.

What are the consequences?

Yesterday the message came from Brussels that the European Commission has decided that the French budget deficit is too high. It’s crazy, it’s been like this for years. According to the Commission, there are no exceptional circumstances, because then they can be tolerated. So it’s not temporary, it’s been like this for years, so the European Commission says there is an excessive deficit. These are very disturbing words in European politics. That’s why I don’t understand the calm or relief that the financial markets are experiencing.

If the European Commission is that strict, what will be the result? Punishment?

What is happening now is that the new French government has to present plans to the European Commission before September 20 to reduce the budget deficit and address the national debt. This will not work with any government composition. So it will not meet this deadline. And that is why the European Commission may have to take tougher measures. This creates tensions and doubts.

What consequences might this have for the European economy?

And so we have to look at interest rates in the financial markets. The spread between the French and German 10-year interest rates yesterday fell from 85 basis points to 65 basis points. Here too we see relief, but this creates a false sense of optimism. I would like to point out the interest rate differential that no one talks about, between Switzerland and Germany. There is a lot of focus on the French-German differential, because it could indicate a possible sensitivity to the common currency, the euro. I look at Switzerland, which is seen as a safe haven in times of uncertainty and tension in the world.

What does the interest rate differential between Switzerland and Germany say?

If the spread becomes too small, it has a dangerous effect. Because if it were just about general uncertainty and tension, German government bonds would also be a safe haven for many investors. Then the interest rate differential would not change. But wait, the spread is -200 basis points. So Germany is paying a full 2 ​​percent more to borrow money. The spread has not been this big since the euro was announced in the early 1990s.

What conclusion do you draw from this?

What I see in this is that the financial markets are already saying that there are a lot of uncertainties and tensions in the world, but they are also inherent in the euro. If France does not come up with plans to address its deficit and debt there, you risk a debt crisis. Germany is a member of the eurozone, so if there are French problems, Germany will pay for them one way or another.

Switzerland is not a European country, so it gets away with it. Investors seem to believe that the chance of a repeat of the 2011 euro crisis is not zero. The relative calm in France following the elections is misleading. We should be mindful that we may have to deal with a new euro crisis at some point in the future.

Is this because of France and not Italy, for example?

Indeed. Italy is also a problem, another classic concern. Like France, Italy is also a big country in the eurozone. But there is a crucial difference. We have been talking about the Franco-German axle for years. Compare it to a car: if something goes wrong in Italy, it means something is broken under the bonnet. A good mechanic can fix that. But if something goes wrong in France, the axle is broken. And that car doesn’t really move forward.