Social Government in France: A Wrench in the Plans

Germany has lost its dance partner…

Francois Hollande is France’s first elected socialist president in 17 years. He has stated that he will reduce the government’s budget deficit while increasing taxes and increasing spending. He believes he can eliminate the budget deficit by 2017.

Just the kind of guy France needs…

Because of the European economy’s recession, France’s budget deficit is already worse than it was a year ago because of lower tax revenue. Hollande wants to spend €20 billion to get the economy going, lower the retirement age back to 60, and raise taxes on businesses and the rich.

The problem is that Hollande doesn’t spell out how France is going to pay for this spending and how he will be able to increase spending and reduce the budget deficit at the same time.

Let’s get real…

The wealthy and corporations in France are going to have little incentive to invest and create jobs if they know their tax rates are going to rise. Their profit margins are going to be squeezed by higher taxes.

These “disincentives” to business come at the worst possible time for France, which needs to create jobs in order to grow with the European economy’s recession hanging over them.

Hollande wants to meet with the Chancellor of Germany, Angela Merkel, to ratify the European fiscal pact, which focuses on austerity measures and reducing budget deficits through fiscal discipline. (I’m sure Merkel can’t wait to have a serious discussion with France’s new leader.) Hollande has explicitly said he will not go along with the fiscal pact of reducing budget deficits unless there are growth provisions added to it to help the European economy.

Over the past few years, it was France’s previous president, Nicolas Sarkozy, who agreed with Merkel regarding the fiscal pact and budget deficits. He convinced the other European members to go along, while the European economy was falling into a recession.

Even if Merkel and Hollande come to some agreement on the fiscal pact, the big test is just a few months away—this summer.

Hollande will present his budget and how he plans to reduce the budget deficit while increasing spending. If the bond market is not convinced by his policies, I believe interest rates on France’s bonds will rise to the levels currently seen in Italy and Spain.

To make things worse, the rating agencies may threaten further downgrades if Hollande’s policies don’t bring down the budget deficits.

Who will buy France’s bonds if interest rates rise, as its budget deficit policies are not seen as attainable by the bond market? With the European economy in a recession, it will have to be Germany that helps France out in some capacity. But now that France no longer wants to play by Germany’s rules, will Germany help?

Back at the ranch, America is far too complacent about the crisis situation in Europe. China’s economy is slowing. Japan is printing money again. What a mess. But have no fear; the Dow Jones Industrial Average is back at 13,000!

Where the Market Stands; Where it’s Headed:

Last year, I made a crazy prediction that stocks would start to fall in mid-April of 2012. I was two weeks too early. Since the beginning of May, the Dow Jones Industrial Average has lost about 500 points…four percent gone, very quickly.

As the stock market continues to fall, get ready for QE3. I bought more gold-related investments earlier this week.

What He Said:

“As a reader, you’re aware I’m not a Greenspan fan. In the years that lie ahead, I believe we (and our children) may pay dearly for the debt bubble Greenspan created during his tenure as head of the U.S. Federal Reserve.” Michael Lombardi in PROFIT CONFIDENTIAL, March 20, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.