It all
boils down to Germany.
I’ve been forecasting for
months that the country will increasingly focus on domestic interests and that
it will ultimately opt to leave the Euro rather than prop up the EU.
The former (focusing on
domestic issues) is already underway.
Germany Plans Joint
Federal-State Debt in Merkel Fiscal Deal
Chancellor Angela Merkel
agreed to share borrowing costs with Germany’s states to help ease their budget
squeeze, completing a deal the
opposition said will help secure German ratification of the European Union’s
fiscal pact.
Germany’s federal and state governments plan their first joint debt sale in 2013 to help the states meet the pact’s deficit limits, the German government’s press office said in an e-mailed statement in Berlin today.
Pressed by the Social
Democrat-led opposition that could block the stricter European fiscal rules in
parliament, Merkel agreed to a policy she opposes in
confronting the debt crisis in the rest of the 17-nation euro area. She
signaled her rejection of joint euro-area debt as recently as June 23, saying
“liabilities and controls” must “go together.”
“We reached a solution that
makes it clear there will be approval” of the fiscal pact in the upper house of
parliament, Kurt Beck, the premier of Rhineland-Palatinate state and member of
the opposition SPD, said in an ARD television interview.
As for the latter development
(Germany leaving the Euro), I believe that this will occur once the EU Crisis
spreads to France. At that point any discussion of EU bailouts is
pointless, as the very countries needing aid (France, Italy, Spain, and Greece)
account for 53% of the ESM’s funding.
So far the markets have been willing to ignore the fact that Spain and Italy are meant to contribute 30% of the ESM’s funding. However, if France starts needing aid (and it will) it’s GAME OVER as any discussion of where the money will come from is moot.
By the look of things, this
development is not too far away. France’s Socialist party took its lower house
during the most recent elections. Already they are proposing reforms that will
result in French businesses and capital leaving the country.
France’s new Socialist
government is embarking on a series of risky experiments in business
Michel Sapin, the labour
minister, has promised to make it so expensive for
companies to lay off workers that it will no longer be worth their while. Firms
that fire people while still paying dividends may be penalised. Another planned
ruse is to force companies to sell factories, presumably along with the brands
manufactured there, to competitors rather than close them down…
Paris is full of rumours of
hasty departures. PPR, a luxury-goods group which owns Gucci and Yves Saint
Laurent, is reported to have plans to move its entire executive committee to
offices in London as soon as this summer. Technip, a global oil-services firm,
is rumoured to be about to move its official headquarters across the Channel.
(PPR declined to comment, and Technip said it has no plans to move for now.) To
the fury of a French member of parliament, David Cameron, Britain’s prime
minister, this week promised to “roll out the red carpet” for French companies
on the run from the new tax.
But the most important
consequence of stratospheric taxes will be less visible, at least at first.
Marc Simoncini is one of France’s best-known entrepreneurs—and one of the few
business leaders to denounce the new measures publicly. Why, he recently asked,
would anyone want to start a business, invest and succeed in the most taxed
country in the world?
Tax is not the only threat to
executive pay. Last week Pierre Moscovici, the finance minister, announced
that pay for bosses of companies in which the French state holds the majority
of shares will be capped at a flat rate of €450,000, or roughly
20 times the wage of the lowest-paid worker. The French experiment will no
doubt be watched with interest around the rich world. In some
cases it will lead to a 70% pay cut. Over time, the quality of
management at these state firms, which had become more professional over the
past decade, will surely suffer. Executives such as Guillaume Pepy, the boss of
SNCF, the national railways, for instance, could secure a top position anywhere
in his industry. Measures to limit pay at fully private firms
are expected before long.
As one would expect, the
wealthy French are fleeing the country.
Wealthy French Take Their
Assets to London
It began in 2010, when wealthy
Greeks started coming to London and buying up expensive townhouses in upmarket
neighborhoods. Amid
fears that Greece might leave the euro zone, they believed their money would be
safe in Britain in its splendid isolation from the euro and the Continent's
sovereign debt crisis.
Then rich Spaniards started
arriving. They were following by well off Italians, who at the start of the
year overtook Russians as the biggest group of foreign buyers snapping up
property in London,
according to a survey.
Whenever the euro crisis heats
up somewhere in Europe, the demand for expensive homes increases in Western
Europe's largest city particularly among well-heeled foreigners beset by asset
angst.
London real estate agents are
like the canary in the coalmine for the debt crisis. They can sense early on
the next country to get sucked into the vortex. So who's up next? Apparently
it's the French.
Real estate agents have been
aware of a new wave of interest for months, but it's been especially noticeable
since Feb. 28. The night before, the then Socialist candidate for French
president, François Hollande, who famously said "I don't like the
rich," announced that, if elected, he would raise the top rate of tax on
incomes over €1 million to 75 percent. At home, he got much applause for the
announcement. But in London, the news produced a reaction that was noticeable
on the computers of the London-based property company Knight Frank.
"Since February, when
Hollande announced his wealth tax, there has been a large rise in web searches
from French customers,"
Liam Bailey, head of residential research at Knight Frank, recently told the
Daily Telegraph…
To meet the demand, the
property company Douglas & Gordon has just opened an office in South
Kensington, where four native French speakers will be available to help out
their house-hunting compatriots. Hollande's tax speech immediately led to a 40
percent increase in inquires from worried French citizens, says David Blanc
from the London asset management firm Vestra Wealth.
French banks are already
leveraged at 25-to-1. The impact of a capital exodus by the wealthy will
rapidly push leverage levels even higher. And given that French banks’ exposure
to the PIIGS is equal to 30% of French GDP, it’s no surprise that French banks
are posting some truly horrible charts.
I expect
the EU Crisis to spread to France before autumn. At that point, it’s game over
for any notion of the current EU lasting. Germany will walk.
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