Latest / John’s Newsletter / Will a profligate France destroy the EU?

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Will a profligate France destroy the EU? · John’s Newsletter

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  [music]
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  SPEAKER_00: Good afternoon,
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  SPEAKER_00: everyone,
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  SPEAKER_00: and welcome to Around the world in 20 minutes,
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  SPEAKER_00: where we try to make sense of the beguiling new planet we find ourselves on.
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  SPEAKER_00: And we're going to do a deep dive into France again,
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  SPEAKER_00: but talk less about the riots going on and more about its economic ills.
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  SPEAKER_00: And actually look at the policy.
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  SPEAKER_00: We've talked a lot about the horse race,
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  SPEAKER_00: Melenchon and Le Pen and the hapless center-right people.
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  SPEAKER_00: But in the end, the key is what do they do and what does this mean?
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  SPEAKER_00: And we're going to test the theory today that
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  SPEAKER_00: a profligate France will actually destroy the EU,
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  SPEAKER_00: whether it means to or not, because paying your bills is suddenly terribly uncool.
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  SPEAKER_00: And the stark reality politically in terms of political risk is that
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  SPEAKER_00: the two top candidates at the moment to make it to the second round of
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  SPEAKER_00: the French election,
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  SPEAKER_00: Mélenchon and Le Pen are both economic illiterates of a different stamp.
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  SPEAKER_00: You can argue that relatively Mélenchon is worse.
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  SPEAKER_00: He's for outright default.
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  SPEAKER_00: Whereas Melenjean says that, you know, everyone can lump it and we just won't pay our bills.
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  SPEAKER_00: And that will free us up to actually incur more debt as though someone would give
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  SPEAKER_00: the French money if they didn't pay their bills.
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  SPEAKER_00: But that's the level of fairy tale we're dealing with.
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  SPEAKER_00: We're talking about someone who draws with crayons here.
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  SPEAKER_00: So there's that.
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  SPEAKER_00: On the other hand,
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  SPEAKER_00: Le Pen says the French can retire at 60,
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  SPEAKER_00: so we move from the age of a toddler to a fetus,
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  SPEAKER_00: and somehow this will work out and there won't be any run on the euro because
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  SPEAKER_00: of French profligacy.
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  SPEAKER_00: In both cases, the EU itself may be in peril.
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  SPEAKER_00: So let's play through what that looks like.
• 1:55
  SPEAKER_00: And again,
• 1:56
  SPEAKER_00: we're always looking to say nice things about what's out there because there's
• 2:00
  SPEAKER_00: so much snake oil and it gets so dreary just attacking the He jumped up.
• 2:05
  SPEAKER_00: That's a sign he's in.
• 2:20
  SPEAKER_00: One of the things that Munchau does really well is play through the policy.
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  SPEAKER_00: He gets through the politics to the policy.
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  SPEAKER_00: And particularly interesting is that he is a Eurofederalist who's been mugged
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  SPEAKER_00: by reason, a Eurofederalist himself.
• 2:34
  SPEAKER_00: He's seen that that simply won't work as things move on.
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  SPEAKER_00: And so he speaks more out of sorrow than anything else.
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  SPEAKER_00: But he still cares more about being a good analyst than he does about cheerleading,
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  SPEAKER_00: putting him in a group of, what, the top 5%.
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  SPEAKER_00: So please go on UnHerd today and look up Wolfgang Munchaus' piece
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  SPEAKER_00: on how France might just bankrupt the EU in the end.
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  SPEAKER_00: And we're going to follow that logic through a little bit further.
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• 5:16
  SPEAKER_00: How can France destroy the EU?
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  SPEAKER_00: Let's play this out.
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  SPEAKER_00: At the moment,
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  SPEAKER_00: and it's close,
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  SPEAKER_00: Le Pen is far and away going to make it to the second round of French voting.
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  SPEAKER_00: Nobody's going to get 50%, so there will be a second round.
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  SPEAKER_00: So one of the candidates will be the rightist populist Le Pen,
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  SPEAKER_00: and the other will either be Jean-Luc Mélenchon,
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  SPEAKER_00: populist leftist,
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  SPEAKER_00: perpetually trying out for an off-Broadway version of Les Miserables,
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  SPEAKER_00: or you're going to get Probably Edward Philippe,
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  SPEAKER_00: probably the best of the Macronista kind
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  SPEAKER_00: of center-right centrist establishment candidates.
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  SPEAKER_00: But at the moment,
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  SPEAKER_00: given the riots and given,
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  SPEAKER_00: as we've said,
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  SPEAKER_00: the strategy of Melanchine,
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  SPEAKER_00: which seems to be working at least at the edges that we're waiting on for polling
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  SPEAKER_00: to really determine this these next couple weeks, it's not out yet.
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  SPEAKER_00: So anybody who tells you it is, is lying.
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  SPEAKER_00: But if he moves ahead just a little bit,
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  SPEAKER_00: gets a couple of these kids excited enough to vote Mandela,
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  SPEAKER_00: It will be the two of them,
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  SPEAKER_00: two economic illiterates dueling it out for power, but they're not equally culpable.
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  SPEAKER_00: Melenchon, I love his straightforward lunacy.
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  SPEAKER_00: He's very,
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  SPEAKER_00: very honest, very,
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  SPEAKER_00: very crazy,
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  SPEAKER_00: and he says, look,
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  SPEAKER_00: we're just going to default on the debt,
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  SPEAKER_00: and then that'll free us up to borrow more money,
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  SPEAKER_00: as though doing this wouldn't destroy the European Union.
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  SPEAKER_00: Think about what this would mean for the European Central Bank.
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  SPEAKER_00: Think about what this would mean for the credibility of the euro.
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  SPEAKER_00: Think about what this would mean across the board.
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  SPEAKER_00: It just doesn't pass the laugh test.
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  SPEAKER_00: He wants to default on the French debt,
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  SPEAKER_00: or at least a portion of the debt, and to do that would be the end.
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  SPEAKER_00: Because both sides,
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  SPEAKER_00: Le Pen and Melenchon,
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  SPEAKER_00: as Munchaus says rather amusingly, It's just not cool to pay the debt.
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  SPEAKER_00: If you pay the debt down, it means you have to have austerity.
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  SPEAKER_00: And if you have austerity, Mandela, what does that mean?
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  SPEAKER_00: It means you can't spend money like a drunken sailor,
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  SPEAKER_00: which is what both sides want to do, even though the debt raises.
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  SPEAKER_00: It's 120%.
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  SPEAKER_00: The deficit's 5% or 6%.
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  SPEAKER_00: It's a wartime deficit, 120%,
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  SPEAKER_00: similar hauntingly to the United States,
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  SPEAKER_00: but without having the reserve currency or growing at 2%, 2.5%.
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  SPEAKER_00: It's growing at 0%, 0% to 1%.
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  SPEAKER_00: And not having the world's reserve currency.
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  SPEAKER_00: So worse in every possible way.
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  SPEAKER_00: And they still want to spend money.
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  SPEAKER_00: They're looking for ways around reality,
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  SPEAKER_00: which makes them both utopian and both dangerous for the EU.
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  SPEAKER_00: Le Pen...
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  SPEAKER_00: By the way,
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  SPEAKER_00: her conviction in the trial,
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  SPEAKER_00: as we predicted,
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  SPEAKER_00: of abuse of EU funds has had absolutely no impact whatever on her popularity.
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  SPEAKER_00: Just as lawfare didn't work for Donald Trump, it hasn't worked in France.
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  SPEAKER_00: If anything, she's more popular.
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  SPEAKER_00: And is well ahead of anybody else, about double the number.
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  SPEAKER_00: She's at 35, 36, and then Melenchon and Philippe are at 18, 17, 16%.
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  SPEAKER_00: So she's going to make it through.
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  SPEAKER_00: For Melenchon, it's simple.
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  SPEAKER_00: It's Les Miserables.
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  SPEAKER_00: Default on the French portion of Euro debt.
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  SPEAKER_00: And then leave everybody else to pick up the pieces.
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  SPEAKER_00: What does he care?
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  SPEAKER_00: That, of course, would lead to the destruction of the EU in turn.
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  SPEAKER_00: Le Pen, however...
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  SPEAKER_00: See, it's slightly more complicated.
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  SPEAKER_00: She's smart enough to have bounced off the longstanding view of her father,
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  SPEAKER_00: Jean-Marie Le Pen,
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  SPEAKER_00: for Frexit,
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  SPEAKER_00: for France to get out of the euro precisely so it could spend more money.
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  SPEAKER_00: Again, she's part of this unholy trinity.
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  SPEAKER_00: But she sees that's unpopular.
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  SPEAKER_00: And so she says, no, no, I want to stay in, but do it on new terms.
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  SPEAKER_00: Of course, these new terms would lead to the end of the EU as we know it.
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  SPEAKER_00: That is something I've alluded to in the past, but I haven't really explained.
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  SPEAKER_00: So let me explain now.
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  SPEAKER_00: Le Pen sees one of the biggest sources of new income coming up.
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  SPEAKER_00: As a unilateral two-thirds cut to French contributions to the EU budget.
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  SPEAKER_00: So one of the ways she's going to free up revenue is unilaterally,
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  SPEAKER_00: and they're just locking in the new budget,
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  SPEAKER_00: unilaterally abrogating,
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  SPEAKER_00: paying two-thirds of the French contribution to the EU budget.
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  SPEAKER_00: This would leave, one assumes, Germany and the Netherlands paying for everything else.
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  SPEAKER_00: So she's just going to abrogate any deal made up to now.
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  SPEAKER_00: And unilaterally have a two-thirds cut in French contributions to the EU budget.
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  SPEAKER_00: She's not going to leave the EU, she's just going to starve it of funding.
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  SPEAKER_00: Okay, that's what she intends to do.
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  SPEAKER_00: The EU would cease to function,
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  SPEAKER_00: obviously, if France were to default on its membership contributions today.
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  SPEAKER_00: Just as it would by collapsing by defaulting on French debt.
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  SPEAKER_00: It's strychnine and hemlock between Melenchon and Le Pen.
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  SPEAKER_00: Melenchon more directly would just default on French debt,
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  SPEAKER_00: leaving the ECB to pick up the pieces and that would be the end.
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  SPEAKER_00: She would just unilaterally default on membership contributions.
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  SPEAKER_00: Now, imagine this were to happen.
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  SPEAKER_00: And imagine you're a populist in, say, Germany.
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  SPEAKER_00: Say you're a member of the AFD.
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  SPEAKER_00: It's Christmas time every day of the year.
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  SPEAKER_00: And this is time for hapless,
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  SPEAKER_00: luckless,
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  SPEAKER_00: hopeless German Chancellor Friedrich Merz to drink the Kool-Aid and jump out of
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  SPEAKER_00: a large building.
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  SPEAKER_00: Because the argument the populists in Germany would be making if either
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  SPEAKER_00: of these things were to occur would be this.
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  SPEAKER_00: The French retire at 62 when they're fetuses and Le Pen would like that
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  SPEAKER_00: and Melenchon as well to go down to 60.
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  SPEAKER_00: Let's lower the retirement age in the face of our bankruptcy
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  SPEAKER_00: and let's either default on our debt.
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  SPEAKER_00: Or ignore unilaterally our membership contributions,
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  SPEAKER_00: thereby in either case leaving Germany and Holland net payers into the EU kitty
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  SPEAKER_00: to pick up even more of the total.
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  SPEAKER_00: So the AFD would be saying,
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  SPEAKER_00: we retire at 67 now,
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  SPEAKER_00: the French retire when they're toddlers at 60,
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  SPEAKER_00: and we have to pay for that difference.
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  SPEAKER_00: Because otherwise they've said they won't.
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  SPEAKER_00: So to keep the union together,
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  SPEAKER_00: German taxpayers have to take on board the increased contribution one way or
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  SPEAKER_00: the other via Melenchon or Le Pen via Hemlock or Strychnine.
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  SPEAKER_00: We have to take So we have to contribute more,
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  SPEAKER_00: even though our economy has been destroyed by energy suicidal green policies,
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  SPEAKER_00: by us thinking we could get better than the Chinese when we couldn't,
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  SPEAKER_00: by the car industry,
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  SPEAKER_00: which is central to the German industry,
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  SPEAKER_00: which is central to the European industry, being destroyed by the Chinese.
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  SPEAKER_00: And yet we have to pay more money to keep the EU together because the French want
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  SPEAKER_00: to retire ever earlier so they can play boule even longer and we can pay
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  SPEAKER_00: for those French people having cruises quite extraordinarily in France,
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  SPEAKER_00: the richest cohort.
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  SPEAKER_00: So the hard-pressed people are paying for the grandparents going on holiday cruises.
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  SPEAKER_00: One generation, the current baby boomers, God rot them, are stealing from the rest of us.
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  SPEAKER_00: And we have to continue this,
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  SPEAKER_00: and not only are you paying for German baby boomers,
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  SPEAKER_00: you're not,
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  SPEAKER_00: you're paying for French baby boomers, because the French have decided in...
• 13:00
  SPEAKER_00: Munchau's words that paying your debts is just uncool.
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  SPEAKER_00: One way or the other,
• 13:05
  SPEAKER_00: this is getting round budget strictures, but there are no free rides in the world.
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  SPEAKER_00: Nothing can be unearned or unpaid for in the universe.
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  SPEAKER_00: That's what karma is, and this means German and Dutch taxpayers will pick up the rest.
• 13:19
  SPEAKER_00: This, of course,
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  SPEAKER_00: is manna from heaven for Dutch like Wilders and or the AFD
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  SPEAKER_00: to say this is just absolute lunacy.
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  SPEAKER_00: So if it is a straight-up deal without ECB intervention,
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  SPEAKER_00: you're going to get a political situation that could well destroy the EU.
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  SPEAKER_00: That is what I am pushing and what Munchau hints at.
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  SPEAKER_00: Now, there's another option, which is the ECB decides that France is too big to fail.
• 13:52
  SPEAKER_00: And so...
• 13:53
  SPEAKER_00: And again, German and Dutch populace will be crazy, but so will Italian populace.
• 13:57
  SPEAKER_00: Italy has even a larger share of debt, but it's been managing about the same rate of debt.
• 14:01
  SPEAKER_00: Italy, 130%, 136%, I think.
• 14:16
  SPEAKER_00: Last I looked, it's been managing this debt now for two decades without expanding it.
• 14:21
  SPEAKER_00: The Italians are actually managing not to expand the debt from the profligate 70s
• 14:26
  SPEAKER_00: and 80s and have for a generation or so managed
• 14:29
  SPEAKER_00: a very high debt fairly successfully.
• 14:31
  SPEAKER_00: But why should they pay for the French to have increased debt
• 14:35
  SPEAKER_00: when they've managed their debt well and when there will be bond contagion?
• 14:40
  SPEAKER_00: Already there is with Italian bonds vis-a-vis French bonds.
• 14:44
  SPEAKER_00: And so this is going to just create immense bad feelings.
• 14:47
  SPEAKER_00: So either the ECB intervenes in a European way,
• 14:51
  SPEAKER_00: then the question is always in Europe, is what are the details of this?
• 14:55
  SPEAKER_00: What are the terms upon which they bail in essence out the French?
• 15:00
  SPEAKER_00: Is it draconian like it was with the Greeks?
• 15:03
  SPEAKER_00: Or is it tiptoeing around them,
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  SPEAKER_00: which will just provide sucker to the populist enemies of the establishment ECB
• 15:10
  SPEAKER_00: in both Holland, Italy, and Germany?
• 15:13
  SPEAKER_00: It's one or the other.
• 15:15
  SPEAKER_00: Either they tiptoe around,
• 15:18
  SPEAKER_00: in which case there's outrage in all the countries paying in around France,
• 15:23
  SPEAKER_00: and Italy and Germany are both serious great powers within Europe, or...
• 15:29
  SPEAKER_00: They demand a lot of the French and the French say, no, I'm not going to do this.
• 15:33
  SPEAKER_00: And then we still have a Euro crisis.
• 15:35
  SPEAKER_00: Increasingly,
• 15:37
  SPEAKER_00: however you slice and dice this,
• 15:40
  SPEAKER_00: a profligate France imperils the EU because whatever is done,
• 15:46
  SPEAKER_00: In the end, someone has to pay.
• 15:49
  SPEAKER_00: However, the French wish they were children and wish this weren't true.
• 16:00
  SPEAKER_00: They will bring the EU down in a secondary manner, an unintended consequential matter.
• 16:04
  SPEAKER_00: That's the risk that's on board underlying.
• 16:27
  SPEAKER_00: All the things we're going to say moving ahead.
• 16:30
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• 16:49
  SPEAKER_00: Thanks very much and see you soon.