Monday, July 09, 2012

France - A Preview Of A Second Obama Term?

Socialist Hollande triumphs in French presidential poll

France, which has already had socialist governments recently elected another one led by President François Hollande, a man who said publicly that he "does not like the rich" and has declared that "my real enemy is the world of finance".

President Hollande favors an EU-wide 'financial transaction tax' on every wire transfer, deposit, securities purchase or withdrawal, raising the top tax rates to 75% and lowering France's already liberal retirement age from 62 to 60. His solution to the eurozone crisis is not austerity and fiscal responsibility but 'growth', a euphemism for increased government spending.

There are some interesting parallels between Hollande's views and those of President Obama. After all, this president's stimulus was pretty much exactly what Hollande and others in Europe are talking about when they speak of 'growth' and the class warfare rhetoric is strikingly similar.

It occurs to me that we may be seeing something of a preview here of what a second term for President Obama might be like.

One of the first things President Hollande did, almost as a victory celebration, was to to announce a huge tax increase of 7.2 billion euros on households defined as 'wealthy' (anyone with net wealth of more than 1.3 million euros), on banks, energy companies and large corporations. Hollande's new laws, which includes major tax increases on stock options and dividends is almost certain be approved by the French parliament, which has a Socialist majority.

As I mentioned, Hollande also has promised to raise the marginal tax rate on incomes over 1 million euros to 75% and put into law a permanent 'wealth tax', which will include inheritance taxes.

Carbon taxes and taxes on financial transactions? Mais oui! France already has them, and the Socialists are already talking about raising them.

It need hardly be added that, like President Obama, Hollande has spent his entire career working in the public sector and feeding off the government teat.

Aside from taxes, Hollande and the Socialists are planning to make sure that there are even fewer of the 'rich' they hate left to tax. Beyond taxes, a new decree will limit the salaries of the chiefs of state-controlled companies such as SNCF railways, and nuclear energy groups EDF and Areva, to 450,000 euros. In some cases, that amounts to pay cuts of 80%.

The Socialists also rejected out of hand a request by Medef, the employers’ confederation, to lower high government charges on employment that increase labor costs and make French businesses less competitive.

There is very little in Hollande's proposals if anything about cutting spending, already at one of the highest levels in the developed world. In fact, Hollande wants to raise spending for 'growth'.

The early results of the Socialist's program are already quite evident.

Growth of the French economy has been downgraded and is now predicted to be static or even negative. The French government is actually reduced to peddling bonds with negative interest rates, believe it or not, bonds that actually cost an investor money to own.This is a drop from previous bond yields of - wait for it - an anemic .3 per cent.

And a great number of French businessmen, entrepreneurs and executives are now considering simply leaving:

Roger, a senior expatriate executive working for an international company in Paris, is thinking seriously of taking a walk down David Cameron’s “red carpet”.

The UK prime minister last month riled France’s new Socialist government when he declared he would lay on a five-star welcome for anyone moving to London to avoid the tax re­gime promised by President François Hollande – including his election pledge of a 75 per cent marginal rate on incomes above €1m a year.

“I’m very happy in Paris. My wife and I love Paris. We came here by choice. But I’m reconsidering our situation given the changes in the pipeline,” says Roger, who declined to be identified by his real name.

More than the 75 per cent rate, it is a move to higher wealth and inheritance taxes that worries him – and what he perceives as a cultural hostility to the rich. “The anti-wealth rhetoric is just not encouraging. I’d rather be in a country where I don’t have to deal with that,” he says.

It is not just expatriates who are concerned. Henri de Castries, head of Axa, the insurer, is one of France’s most respected business leaders. “I’ve listened to Mr Hollande. He wants to see more growth and lower unemployment. He wants to see business prospering. We want to see that, too,” he says. “The question is how to achieve these goals? There is no example, in modern economic history, of a country that has succeeded in reducing its deficits by bringing taxes to a confiscatory level. On the contrary, it leads to a decline in activity, and an increase in the deficits.”{...}

The chief finance officer of a big industrial company says the first question asked by investors – French and foreign – is now about the government’s policies and whether the tax rises will affect senior management. But he says the main effect will be to drive away owners of smaller businesses who fear not being able to cash in their wealth when they want to sell their companies. “It will be like the UK in the 1970s,” he says. “We will lose a generation and they won’t come back.”

Philippe Kenel, partner at Swiss-based tax lawyers Python & Peter, says that he relocated 12 people from France to Switzerland up to the end of April – just before Mr Hollande was elected. “I did in four months what I usually do in a year.”

Roger says another danger is that foreign managers will no longer be drawn to the country. “In the past five to 10 years, French companies have been attracting more international talent. But who would want to come to Paris to run a company in the current environment?”

Indeed, is there any incentive at all to even work in such an environment? Americans living in a country where the president regularly demonizes 'the rich and where recipients of food stamps (and yes, free government provided smart phones with internet access) are increasing by leaps and bounds should start asking themselves the same questions. Meanwhile, President Obama has already said he wants a tax increase on his version of 'the rich' - anyone grossing over $250,000 per year, including a lot of small business owners.

Just imagine President Obama in office for another four years, free from any worries about re-eelection and with a Democrat majority in Congress and I don't think the scenario of America as France is too far off.


Ben Wolf said...


The fact that France can charge savers a premium on its bonds means there is high demand for French debt, not that France is "reduced" to peddling anything. It also means markets have high confidence in the French economy at this time, otherwise yields would be going up instead of dropping.

Rob said...

This isn't a 'premium' Ben,but a desperate attempt to sell debt.

Economics 101 - when things are in demand the price goes UP,not down. The yield spread on risk is an entirely different factor, as an add on. You actually thing people are lining up to lose money? If markets had confidence, the French yield would have at least stood pat at .3 percent.It didn't.

There is plenty of safe government debt available at higher credit ratings that is not at negative interest rates, and savvy investors know all about them.

If you're the kind of person who is willing to shed cash from the outset by buying French debt at negative interest rates, I have a bridge to sell you.


Ben Wolf said...

The premium IS a higher price. Investors are willing to forgo a positive yield and on top of that pay the French central bank a fee for the right to purchase French public debt. Yes, the private sector is willing to lose money so as to purchase public debt because those bonds are viewed as he safest possible place for it. The irony is that thosebonds are not particularly safe because France is operating in a foreign currency, but for now the non-government sector is screaming for publc bonds and will pay whatever the French government wants.

This same phenomenon happens in Japan and can happen in the U.S. if the Federal Reserve so chooses.

Bourbon said...

Sorry Rob, Ben is right and you are wrong on this one. Bond interest rates indicate risk. High rate, high risk. Low rate, low risk. Negative rate, very low risk. This is what the market is saying. I know it's totally bizarre, but I think the message is that French bonds are considered "safer" than the alternatives, i.e., Italy's or Greece's. Price and yield are inverse on bonds, so your Econ 101 comment is correct, the price of French bonds DID go up, to a premium above par value. Why is certainly hard to understand.

Rob said...

OK, duly noted. But if I were an investor in the market for relatively safe public debt , I couldn't see why I wouldn't buy U.S. debt or British Gilts, which are probably even safer than French bonds and still pay positive interest rates.Even a garden variety Series EE pays .60 %

For that matter, an Israeli 2 year bond is at .65% and a 3 year clocks in at 1.29%, while a Norwegian 10 year bond is at well above 2%.

Both those economies are far better risks than France.I can't imagine why any investor would choose to purchase an investment that loses money.


Ben Wolf said...

At this point there simply isn't enough debt being issued by the U.S., Britain or Japan (the only economies capable of absorbing large quantities of capital) to satisfy global demand. I wouldn't touch French or German bonds for all the tea in China because of the inherent flaws in the European Monetary System, but bond markets appear so desperate they'll try anything to protect their financial wealth.

Rob said...

That's got to be pretty desperate.

Actually, as an investor Israel, Norway and Switzerland look far better in terms of yield and risk...and even a vanilla EE bond, T-bill or high quality municipal is better if you're a U.S. citizen and can utilize the tax advantage.

Israel, a country that is adding considerable infrastructure because of recent oil and gas discoveries, the new railroad between Israel's Mediterranean ports and Eilat, and a new port on the Red Sea in a project partially financed by the Chinese pays 2.25 on a 5 year bond and 3.58 on a 10 year.

Canadian bonds pay between .97 and 1.54. depending of how long the redemption period is.

Both countries are extremely stable and have largely avoided the current financial maelstrom because of their banking laws.

And there are always things like annuities, insurance contracts and high grade, short term commercial paper that are only slightly less risky. If you have $50K to invest, you can get a highly liquid and flexible annuity with no broker fees with top rated Swiss insurance company that has a yield of 2.75%.

I totally concur with you about French and German bonds, or indeed any country using the euro.I'll be surprised if the whole thing lasts another year.