The Ticking Time Bomb at the Heart of Europe

No follow-through after the big surge in stocks on Monday. Nothing has changed. We still have a punky stock market that appears to want to go down.

So, let’s change the subject. Let’s talk about the frogs. We love the French. We lived among them for 15 years. We learned their language. We learned their ways.

But we never learned to love the way they treat people who try to make a buck. They act as though it were a crime… or should be. And if you actually succeed — despite the efforts of the French regulators, politicians, solidarity whiners and union bullies — they take the money away from you.

Nobody is as greedy as a Frenchman who doesn’t care about money. He pretends to think it is vulgar to earn money… but he has no inhibitions about spending it. Especially if it doesn’t belong to him. Just drag a 10 euro note through the streets of the 16th or the 9th arrondissement of Paris. You’ll soon be trailed by a small army of tax collectors.

Trouble is, the tax collectors have few targets left. The rich are deserting the country. From The New York Times:

Quite a few of France’s most wealthy already have moved abroad to avoid the country’s stiff inheritance and wealth taxes. Now, real estate agents say, the younger working wealthy are also on the move, unhappy at the prospect of a 75% tax on income of more than 1 million euro, or $1.28 million, and a capital gains tax of over 60% on stocks, bonds and company sales.

Le Downgrade

Raising taxes has cost France some of its most successful and more productive citizens. But it hasn’t done much to help the country’s finances. Moody’s downgraded its debt again on Monday. As Reuters reports:

Moody’s Investors Service downgraded France’s sovereign rating by one notch to Aa1 from Aaa, the agency said on Monday, citing the country’s uncertain fiscal outlook as a result of “deteriorating economic prospects.”

Moody’s said it is maintaining a negative outlook on the country due to structural challenges and a “sustained loss of competitiveness” in the country.

Standard & Poor’s has a AA-plus rating and negative outlook on France, which it downgraded by one notch in January from AAA. Fitch Ratings has France at AAA, also with a negative outlook.

The loss of Aaa rating from two agencies poses a problem for France, as investment funds often require their best assets to have a minimum of two top notch ratings in order to remain in their portfolios.

The zombies have their man in power: Francois Hollande. But the French president is finding that he can’t please all the zombies all the time.

France has already borrowed and spent too much. It can’t plausibly shift more of the national wealth to the zombies without destroying its credit.

This puts Hollande in a tough spot. He has to raise revenue. But he can’t squeeze the rich much harder.

This week, he explained his approach. In addition to tax hikes aimed at the rich, he also proposes to raise the sales tax from 19.6% to 20% on a range of consumer items. Plus, he’ll impose special punitive taxes on some items.

The War on Chocolate Spread

One thing in that unhappy category is palm oil, on which the tax will be quadrupled.

What’s wrong with palm oil? Apparently, some of Hollande’s zombies argue that it is bad for your health and bad for the environment.

But other zombies, also his supporters, eat a lot of Nutella — which is a bit like peanut butter, but made from hazelnuts, chocolate and palm oil. The French consume 75,000 tons of the stuff every year. For many it is an important part of the diet. So, the French Communist Party has declared that a tax on Nutella is a “tax on the workers.”

What’s poor Hollande to do? He needs to raise revenue on one side. His commie supporters are on the other. And then there are the palm oil haters!

Ooh la la! “The tide is turning for France,” remarked a fund manager interviewed by CNBC yesterday.

The French economy is not growing — with GDP increasing at 0.2% in the recent quarter, well within the range of statistical error. Its rich people are leaving. It has high unemployment. The debt rating agencies are on its case. And this week’s Economist newspaper cover shows a bundle of French baguettes with a lighted fuse. The headline: “The time-bomb at the heart of Europe.”

“French bashing,” huffed finance minister Pierre Moscovici.

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