Tant pis

Yesterday Christian Noyer, head of the Banque de France, said that the credit rating agencies were politically motivated and that the UK should be downgraded ahead of France. Today the French finance minister, François Baroin, described the UK economic position as “very preoccupying” though it probably sounded a bit more elegant in French. This is all rather pathetic (or pathétique if you prefer). It also looks rather as if the current French government plan to deal with their impending loss of AAA sovereign credit rating is to blame it all on the Brits.

These two similar countries have often used each other as rhetorical and occasionally real punchbags, but it’s discouraging to see such nonsense. The UK 10 year gilt yield is 2.1%, France’s is 3.0%. Not exactly catastrophic in either country, because the markets expect low growth and low inflation.

The real threat is German fiscal absolutism, to which the UK government is closer than it should be. The UK is locked into a self-imposed deflationary policy which the rest of Europe is now likely to copy. Everyone is trying to rebuild their balance sheets by running a surplus. Although in theory the whole EU economy could do this, it would mean that the rest of the world would have to run a corresponding deficit. Since China, Japan and the OPEC nations are all running structural surpluses, that leaves the remaining emerging markets plus the US to run a gigantic deficit. Goodbye to the dollar if that happens. In fact the Republican Party in the US seems also to believe that near term fiscal stringency is a good idea (long term it’s definitely needed in the US, but not yet). Perhaps Brazil can run a vast deficit to offset everyone else’s surplus. Turkey already has a massive deficit and needs to make it smaller, so not much hope there. What’s left? Australia? Well their surplus (and that of Brazil) could tumble fast if China’s housing market really crashes, as house construction has been one of the largest drivers of global demand for steel and so iron ore.

There are really serious problems out there. It’s good that a much more sensible French financier, Christine Lagarde, the MD of the IMF, is telling it like it is.

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