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European Financial Crisis Testing France

The IMF has warned France that its budget deficit will not hit the target (3 percent of GDP in 2013) without more spending cuts.  Bad news for President Sarkozy’s uphill re-election campaign, and a sign, also of the growing strains at the heart of modern Europe: the postwar partnership between France and Germany forged by Konrad Adenauer and Charles de Gaulle.

The EU began as a bridge building project: to bring longtime rivals France and Germany under one roof and to connect what at the time was an immense gap between Europe’s Germanic north and its Latin south.

The Latin south was Europe’s Third World: corrupt, inflationary, with an oppressed peasantry and a powerful church.

France bridged that gap.  A Latin, Catholic country with an advanced industrial and scientific sector, France had a foot in both camps.

Europe today is splitting along the old north-south divide.  The Latin countries (plus Cyprus and Greece) don’t want and can’t handle the social and economic discipline needed to give them an economic profile like Germany’s.  And the Germans don’t want to subsidize lavish Latin lifestyles.

The current crisis tests France’s ability to have it both ways.  Until recently, financial markets overlooked the historical differences between northern and southern European economic performance.  They aren’t ignoring them now, and France faces a cold and hostile scrutiny from investors who wonder how long France can combine its preferred social model with membership in a Germanic monetary union.

Watch Frence financial markets.  Watch the spread between French and German bonds.  Watch the threat to France’s credit ratings as defaults in southern Europe erode the capital base of French banks.  Can France hold together while cleaving to German-style economics?  We shall see; the IMF warning is an important early test.

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  • Eurydice

    Oh yes, that pesky 3% target – the one they’ve been massaging since the beginning of the Euro. Back then it wasn’t assured that even Germany had reached it without wind assistance.

    Hell hath no fury like investors with hindsight – once they’re done with France, they’ll be looking at Germany.

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