The police presence was heavy as usual, but the oppressive,
volatile atmosphere that had cast a pall over the Champs Elysées, and indeed
the whole city in previous weeks, had lifted.
Instead, an air of expectancy mixed with curiosity had gradually set among
the assembled multitude. But the police
prefect was taking no chance, as dozens of armored transports and riot control
vehicles were massed, out of sight, on the rue de Ponthieu and Avenue Kleber.
HE had been waiting for an even longer time, twelve years to be
exact. He had lost the 2012 elections
more than his adversary had won them.
The French had rejected an hyperactive President in favor of a calmer,
blander alternative; they had turned their back on “a certain idea of France” and
voted in favor of a more comfortable, traditional vision that had much in
common with that of an ostrich in imminent danger. In truth, HE had not helped his case: during
most of his term, his unbound energy notwithstanding, he had rarely given a
sense of what his governing priorities were or should be, and during the
presidential campaign, he had shied away from focusing on the challenges and
policy choices that faced the nation.
Hated by many, radioactive to his fellow UMP members, Nicolas
Sarkozy had accepted a fellowship at the Hoover Institution of Stanford
University. Within a few years, he had added
a teaching position at the university’s Political Science Department and become
involved with Stanford’s famed Business School.
In 2018, the IPO of Uwin, in
which he had invested $200,000, made him the first billionaire ex-President. He was half way through his traversée du desert[1]. Now a very wealthy man, and the symbol of the
modern politician who reinvented himself successfully if unconventionally,
Nicolas Sarkozy would spend another six years trying to reenter the French
political scene.
Far from the Californian shores, France was not doing so well. Neither the new president nor the French felt
like paring the budget. Having promised his
electors economic growth rather than public spending cuts, President Hollande
found it difficult to backtrack, even when faced with a budget deficit bigger
than expected. Taxes on the rich were
raised yet they brought in but a fraction of the needed revenues. So fiscal policy was relaxed, deficit targets
were postponed and pressure mounted on the ECB and Northern Europe to provide
additional deficit financing.
Had France been isolated, it may have been forced to face the
music, but it was not alone; Spain and Italy were in the same situation, having
to push through austerity measures which were increasingly unpopular and politically
explosive.
On the other hand, Germany, already facing slowing economic growth
and the fallout from China’s recession, was growing more and more concerned
that its financial commitments vis-à-vis the eurozone were becoming so large as
to be internally destabilizing.
Netherlands, Finland and Austria were on the same page, and in any case
too small to shoulder a greater eurozone assistance program.
This all came to a head at the Antwerp conference of 2014. The new Spanish prime minister, who had just
spent two weeks battling with the regional governments of Catalonia, Andalusia
and Murcia, announced that he was neither in a position to accept more outside
supervision from the troika nor to pay the sovereign debt as scheduled. His Italian homologue noted that his new
coalition in Congress wished to revisit some of the reforms voted under the
Mario Monti government and that, in any case, the Spanish crisis made it
impossible for Italy to access the financial markets on sustainable terms. France for its part had been under a three
weeks general strike which had escaped the control of the two dominant unions,
the CGT and the CFDT, and leftwing splinter parties under the leadership of
Jean-Luc Mélenchon were calling for the nationalization of
half of the companies in the CAC 40 index.
President Hollande had to decide which way to go. In the end, he calculated that he couldn’t win
over the strikers or the opposing political parties because they would never
accept the necessary remedies which, in any case, he didn’t himself fully embrace. He also felt that the country was far richer
than generally acknowledged and could take care of its own financial problems
if these were, at least partially, reduced.
On October 15, 2014 in Antwerp, Germany, Finland, Austria and the
Netherlands formed the New Eurozone, anchored by the Euromark(€Mk). Central banks’ balances with the ECB were to
be settled via new 10 year ECB bonds.
Given the instant 30% appreciation of the €Mk vs. the €,
Germany took an immediate mark-to-market loss of some €200 billion on its ECB
credits. On the other hand, it also
showed a comparable gain on its outstanding sovereign debt for the opposite
reason. The top French, Italian and
Spanish banks were nationalized.
In the months and year that followed this historical
event, it became clear that Anwerp solved only in small part an economic
problem, but was even less successful dealing with political challenges.
The German economy took a hit, but not as hard as some
had feared. The €Mk proved a serious
headwind to exports and corporate profits, as German exporters cut their
margins to the bone to preserve market share.
Imports by France, which represented 19% of total, plunged. On the other hand, parts and other imports from
France, Northern Italy and Spain rose. Corporate
efficiency campaigns went into high gear to mitigate the pricing headwind of a
strong currency. Endowed with a super strong
€Mk, German companies accelerated new capital investments in Asia, Mexico and
the US. By the end of 2017, the German
economy had regained it mojo, and the timely Chinese recovery proved an added
bonus.
In France, the competitive boost gained from a
weaker euro was transitory. It weakened
the case for deeper reforms. It
depressed consumption and therefore tax revenues. Faced with a diminished purchasing power and
depreciated savings, the population soon became restless and clamored for “a
new deal”. But faced with high borrowing
costs, the government had limited resources.
So, in 2015, new taxes were levied on those who profited from the
devaluation, mainly exporters and international firms. Next, private savings were channeled to
finance what amounted to general budgetary shortfalls. As this was not sufficient, the government
reached farther for new sources of funding.
In 2017, “Social Solidarity Financing Programs”, or PROFINSS, were
started whereby public assets, services or institutions were used to
collateralize new public debt issues.
The state of affairs was not very different in Italy
and Spain. In particular, social and
political unrest had become pervasive in Spain where the central government was
still faced with a volatile conflict with the regions. For the first time in recent memory, Italy
was faced with its own kind of regional strife, as Northern Italy was in open
conflict with Rome.
With stagnant economies and restive populations,
these three countries pressed the ECB to increase its emission of money, trying
to compensate some of the adverse effects of this policy with export incentives
and targeted compensatory schemes. By
2020, most French salaries included indexation provisions and inflation had
risen to 7% p.a. At the same time, price
controls had been expanded, so that the official consumer price index was
widely viewed as understating inflation by several hundred points.
As we have seen the Antwerp conference and its
aftermath had brought France little relief.
The 2017 presidential elections were hotly contested but the right lost
handily, divided as it had always had been.
President Hollande also lost, to his minister Arnaud Montebourg. The new president was viewed as more
charismatic and “progressive” yet not as extreme as Mélenchon. Yet Mélenchon
and his Left Party scored big at the legislative elections and assured their participation
in the new government. Also scoring big
was the National Front of Marine Le Pen with the support of some refugees from
the UMP.
By the time the 2022 elections came around, the
world economy had mostly recovered from its slump of a decade before. China was in the midst of its Domestic
Frontier program aimed at accelerating the development of its Western
provinces. Mexico had become the latest
emerging markets star and the leader of a revitalized Latin American free trade
group which included Chile, Peru, Colombia and a reborn Venezuela whose oil
production had reached 4 million barrels per day thanks to the historic opening
of its energy sector to private companies.
The US too was on the mend, having flirted twice with disaster but
finally built a block of moderates from both parties in the House.
Southern Europe lagged behind. In France, the 2022 had brought a new
president, former Socialist Party Secretary Martine Aubry in the same role of
conciliator as that thrown upon Montebourg five years earlier. The opposition was led by Marine Le Pen as
the leader of the Union pour un Movement Républicain-UMR, the result of the
fusion of the UMP and the National Front.
By then, the Socialists and the UMR parties had
hardened their positions, as each firmly believed that it could impose its
views, bloc the other and win over the support of the population thanks to
massive demonstrations or other spectacular action. Crime had become a major social issue and how
to combat it was a key political battle ground; the CGT and CFDT unions backed
the government while the police unions supported the more vigorous policies advocated
by the opposition. Over the next two
years, the policy stalemate continued and pressure built.
In 2024, with little economic growth, continued
capital flight and persistent inflation despite administrative price controls, the
government took the fateful decision to nationalize what it called the Six
Strategic Pillars of the economy: Electricité de France, France Telecom, Lafarge,
Renault, Suez and Total. The government
had expected that this move would not be overly disruptive; after all, the
Paris stock market had been in a state of torpor for years, all six stocks traded
at already depressed levels and state intervention in their affairs was already
pervasive.
Market and popular reaction was however wholly
unexpected. While many had not minded
the state controlling prices and browbeating wealthy executives, they were now aghast
that the attack was directed at their own property. Also, while stock prices had been depressed
for a long time, dividend yields were attractive as they approximated official
inflation levels. Finally, the
nationalization raid had come out of the blue and nobody knew what else was in
the offing. On the far left, politicians
were up in arm when the prime minister announced that compensation would be
paid “based” on market prices; why should taxpayers money be used to reward
those who had unjustly profited at the expense of the working class? Institutional investors, for their part,
wondered whether they should wait or just dump all their holdings.
On that day of May 21, 2024 the already depressed
CAC 40 dropped by 27% before trading was halted. International suppliers made it clear that
they would suspend all non-essential dealing with the Six Pillars until further
notice. S&P, Moody’s and Fitch
downgraded the Six’s credit ratings by five notches triggering sharp drops in
their bond prices. French sovereign and
other top corporate bonds swooned in unison.
On the morning of the 22nd, the Paris Stock
Exchange didn’t open for trading and a €4 billion OAT issue was cancelled. By noon, when trading finally opened, the CAC
40 fell another 11% whereupon the exchange was closed for the day. Sporadic runs by depositors on branches of
BNP, Crédit Agricole and Société Générale were reported in Lille, Strasbourg
and Grenoble.
By the 23rd, the UMR had called on the
government to explain its ill advised nationalization in Congress, with
supporters and detractors engaging in shooting matches and government members
occasionally ducking for cover as projectiles of various shape and weight flew
across the Chamber. Outside, civilians,
union members, and employees of the Six were picketing, milling around and
waiting for something to happen.
On the 26th, two things became crystal
clear: (1) the government was going to fall, and (2) the UMR had zero chance to
replace it.
And so, on the 29th of May, 2024, at
approximately 6 pm, Nicolas Sarkozy, former president (2007-2012), former fellow
of the Hoover Institution, venture capitalist extraordinaire, walked up the
length of the Champs Elysées, accompanied by his wife Carla and his two
daughters, and by the clamor of half a million French. His hair was grey and his cheeks were
rounder, but years of surfing in California had helped him stay in shape, and
he effortlessly glided up the famed avenue.
The government had resigned; President Aubry had asked
Nicolas Sarkozy to form a new one. She
had also agreed to resign within three months so that new elections could be
called. Already, brand new banners,
white and blue background with “France Avenir” in bold red letters, were fluttering
in the breeze, portends of campaign soon to be launched.
The
above is just an exercise in political fiction, although it attempts to find a
realistic base in history and economic realities. But it is only that. Alternative scenario could have been proposed
which would have a chance of happening.
The point of this fable is not to guess what the future will be
like. It is to illustrate as vividly as
possible the fact that the latest debt and European crises have had severe
economic consequences, yet relatively mild political ones.
In
our view, the next few years are likely to bring about political upheaval on a
scale comparable with the economic upheaval we have been through so far.
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