Greek exit will be another "Lehman moment"

“For me, a Greek exit has long since lost its horrors.”
--German economy minister Philipp Rosler,  July 22, 2012

So let me get this straight. Europe has been moving heaven and earth for the past two years to prevent a Greek exit. We were informed in hushed tones that a Greek exit would be a disaster for the eurozone. Trichet said that default by a eurozone government was impossible and “unimaginable”, and that such talk was irresponsible. We were told that anglosaxons didn’t understand “Europe”, that our arithmetic and pencilled debt ratios were irrelevant.

Now, the European wizards are telling us that a Greek exit/default/repudiation is not only thinkable, but not a big deal. “Nothing to see here folks, move along.” As a colleague at Moody’s used to say about managements in general: “No problem, no problem, Oops!, no problem.”

So don’t worry that, after spending billions to prevent an exit,  Europe is about to cut Greece loose. There will now be fewer but better eurozone governments; what Radio Tokyo used to call a “strategic consolidation of forces”.

My prediction is that Trichet was right all along: a Greek explosion  could be a disaster for the eurozone. First of all, Greece owes a lot of people a lot of money: the ECB, the EFSF, the IMF, the European banking system, and all of the hapless depositors in Greek banks. They will all be defaulted upon, with varying consequences. Just because we have all "known" that this would eventually happen doesn't mean that the world won't be thunderstruck when it does. A Greek exit will be a very big deal with a plethora of known unknowns and unknown unknowns. For example:

• Will foreign governments freeze Greek banks’ assets and liabilities?
• Who will be the receiver for Greek bank branches in London?
• How will UK banks view their continental counterparties in Spain and Italy after a Greek redenomination?
• How will Greece treat Greek citizens with euro deposits in foreign banks?
• Will Greece close its borders and confiscate all euronotes?
• What kind of exchange controls will Greece impose?
• What will become of euronotes issued by the Bank of Greece? (Note: The identification code letter is Y.)
• What will be the accounting treatment for frozen deposits in Greek banks?
• How will Greek bank and government bonds be valued on banks’ books?
• When Greek default rips a huge hole in the ECB’s balance sheet, will this require a recapitalization (which will annoy the German public)?
• What will the Bundesbank’s balance sheet look like after Greece repudiates its TARGET2 liabilities?
• How will the ECB treat the Bank of Greece and the Greek banking system after exit?
• How will Greece pay for essential imports on Day Two?
• If the Greek government loses control, will the army step in, as it did in 1967?
• Will European governments have to intervene and purchase at par all Greek assets held by their banks?
• How big a dollar swap line will be required by the ECB?
• Can the looney-tunes in Congress prevent the Fed from lending to the ECB?
• How soon before foreign creditors try to seize all Greek government assets outside of Greece?
• When the Greek government and banks are declared in default under English law, what happens then?
• Will European banks do business with Greek banks who are in default on deposits and bonds?

I’ve gotten tired of listing the known unknowns, but you get the idea. A Greek exit, if it occurs, will be a Black Swan as big as Lehman. It will be “the” event of 2012 (unless Spain goes too).

A Greek exit may have lost its horrors for Herr Rosler, but not for me.

France rises above economics

He tells the French it is OK to love equality and social awareness more than success and money...
Hollande refuses to be made a prisoner of the constantly-invoked “harsh realities” of freewheeling capitalism, which are supposed to justify highly inegalitarian economic policies...
The French are wise to have elected a leader who makes his appeal to his countrymen’s republican social values rather than to their disappointed economic ambitions.
“Can the Socialists Fix France (and Maybe Europe)?”
Commonweal, 13 July 2012


You have to love the French Left. Their Marxist economics have always been hard and masculine and, above all, rigorously scientific. They have harnessed dry socialist theory to the practical management of a modern industrial economy. They write about “concrete” matters such as agricultural collectivism or the development of heavy industry, always in a scientific manner, and always without sentimentality or pity.

Those who would call attention to the rather unattractive human consequences of 20th century socialism would be accused of bourgeois sentimentality and false consciousness. The task of building socialism is not a tea party, and inevitably, many will suffer in the historical struggle.

But look at the French Left today. When confronted by a real economic crisis, one as simple as third-grade arithmetic, they disdain the “harsh realities” of capitalist economics and embrace the economics of “equality and social awareness”. In other words, when communists exterminate entire classes, that’s the cost of history. But when markets demand fiscal discipline, that is heartless. The French Left has gone from being the party of harsh reality to being the party of squishy sentimentality and wishful thinking. As ever, ideology triumphs over mere facts.

The Socialist Party now rules France. The people of France voted against the nominally capitalist party and voted Socialist, the party of equality and social welfare. This is the France that finances itself in foreign currency, has a big fiscal deficit, high debt ratios, high unemployment and almost no growth. High debt, big deficit, high unemployment, no growth: those are facts; they’re not negotiable; they cannot be “redefined”. France must either demonstrate to the bond market that she can stabilize her debt ratios, or she will eventually lose market access and default. What difference does it make that these facts are “harsh”? Can Hollande select a different set of facts?  

But France has rejected austerity, and intends to raise the minimum wage,  increase government spending, lower the retirement age, and build the socialist state, all paid for by levies on the “rich”. The more France spends on socialism, the more it plans to tax the rich. Those are "socialist values".

The harsh realities of capitalist economics may matter elsewhere, but not in France. Those laws have been suspended because the socialists have a vision that goes beyond mere economics.

I can think of one reason why the French don’t understand capitalist economics: because it isn't taught there. The academic discipline of postwar capitalist economics is anglosaxon, not French. In the anglosphere, we are taught about neoclassicism, Keynesianism, monetarism, the Chicago School, and the other attempts to explain the workings of a capitalist economy.

In a French university, "economics" consists of the socialist critique of  capitalist economics*. The postwar French intelligentsia studied, not growth or the business cycle, but how to combine the best parts of capitalism and communism (voila: socialism!). If you go to a bookstore in Paris, you will find thousands of heavy volumes on the defects of capitalism; you won't find one book that explains modern capitalist economics, except in translation.

When was the last time that a French economist won the Nobel prize? I can’t find any (unless you count expatriates). The Nobel prize in economics goes to the anglophone, not the francophone.

Today, the ruling political party in France is not capitalist, it is socialist. That’s not a blazing insight, but it might explain why France is distinctly uncomfortable with topics such as “competitiveness”, “real wage growth”, "structural rigidities", “debt ratios”, and “fiscal discipline”. Those are foreign terms that are used to impose the anglosaxon world-view onto France.

I remember when I was a bank analyst in the 1980s, trying to explain credit ratios to European banks. They would deny their applicability to Europe because  credit ratios are “American”. European banks couldn’t be understood using “American ratios”.

I see that today in France. There is a prevailing sentiment that capital markets are an alien concept and a part of the anglosaxon conspiracy. The markets are “harsh” and “unforgiving”, as if there were an another way for a country to borrow trillions of euros.

This much I do know: when France blows up, it will be blamed on capitalism, not socialism.
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*If you think I exaggerate, read this:
http://www.foreignpolicy.com/articles/2007/12/13/europes_philosophy_of_failure

Eighty years after Hoover, Republicans still cling to hard money

House Republicans pressed the Federal Reserve chairman, Ben S. Bernanke, on Wednesday to forswear additional actions to stimulate growth...

“The truth is, the Federal Reserve cannot rescue Americans from the consequences of failed economic and regulatory policies” the committee chairman, Representative Spencer Bachus of Alabama, said in his opening statement.

Other Republicans cautioned that an expansion of the Fed’s existing efforts could deepen the nation’s financial challenges by postponing a necessary reckoning and eventually accelerating the pace of inflation.
--NYT, 18 July 2012

The House GOP appears to have taken the position that further monetary expansion shouldn’t be pursued because it would postpone a “necessary reckoning”. In other words, weak growth and high unemployment are good because Americans need to be punished for Obama’s failed policies.

One suspects that the GOP is afraid that monetary expansion would spur growth and help the  Democrats on election day. That would be logical and understandable, since unemployment hurts Obama. I can accept short-term disingenuous politics. What I can’t accept is that the Republican House really believes that a day of economic reckoning is a desirable thing.

My concern is not that the Republicans will prevent the Fed from pursuing growth policies before the election; I want the Democrats to lose just as much as the next guy. My concern is that they are stupid enough to pursue hard money policies even after they get control of the government. I want limited government and prosperity. I don’t want another Hoover administration that would set back the cause of liberty for another eighty years. I shudder to think what nutcase could be the next Fed chairman if the hard-money boys get their way.

What the hard-money Republicans don’t understand is that their hard-hearted monetary policies result in soft-hearted liberal policies that only compound the economic damage. The Bush recession gave us ObamaCare; God knows what liberal panacea the Romney recession will give us.

It is remarkable that, after hard money wrecked the Republican party under Hoover, eighty years later the same economic nonsense still haunts the GOP. Williams Jennings Bryan must be looking down with a big smile on his face somewhere up there in Free Silver heaven.

Will Greece finally submit?

As someone who is not an admirer of European social democracy in any of its national costumes, I observe Greece’s financial spasms with clinical interest. For over two years, Greece has promised austerity in order to continue to get more handouts from the EU. Many repeated promises, but no actual public sector layoffs or social welfare cutbacks.

As we sit here, the Greek political class is searching for another way to convince the Troika to fork over more money without having to lay off one single state employee. They need the money really really bad right now, because their government revenue is spiralling downward. They can’t raise revenue and they can’t borrow, so they have to get paid right now as in, like, yesterday.  

The Troika, so far at least, has not blinked. They want to see parliament pass and the government implement the austerity legislation that they have so painstakingly dictated (see: “Germany plays with Greece”, Feb. 9th). Cut spending or no more handouts.

The Greeks do have leverage: "Give us the money or we will repudiate all of our debts". In the past, this threat has been successful. It may yet be again. But, as I say, so far the Troika hasn’t blinked. The longer the Troika doesn’t blink, the more desperate the Greeks will become because it appears that they are really about to run out of money.

They face an unpalatable choice: pass the legislation, lay off a lot of people and face riots; or, default, repudiate and redenominate. While redenomination will allow them to pay all of their employees and social dependents with Monopoly money, it won’t allow them to import anything unless it can be used to buy hard currency. That is a hard constraint.

The political class cannot imagine laying off state employees or cutting welfare programs, so they can only play games with the Troika. But it appears that they will soon have no choice but to obey the Troika’s diktat.

Does Europe plan to end "Too Big To Fail"?

Officials from rich northern countries, led by Germany, have said that taking joint responsibility for bank rescues is possible only if recapitalizations don't create major losses—a strong case for putting a heavier burden on private investors.

The EU... in June proposed a new legal framework for dealing with failing banks...Crucially, the new rules would force national authorities to force losses on—or "bail in"—all creditors, for instance by converting debt into shares, when a bank has to be recapitalized by its governments.

WSJ, 15 July 2012

It would appear that the EU and/or the eurozone are drifting in the direction of removing the safety net from senior creditors and thus ending Too Big To Fail (TBTF). If the proposal becomes law, bank resolutions would impose losses on senior creditors. This means that, if regulators can write off senior debts without a court-supervised liquidation, then senior debt is neither senior nor debt, it is capital. Real debtholders have the right to demand a liquidation, with losses assessed against more junior claimants. If regulators can simply step in and treat senior bonds the same as other capital instruments, then senior bonds are capital instruments. When a bank can default on its senior debt, it is not TBTF.

This is another example of the eurozone expressing its unconscious death wish. Earlier, the zone experimented with the idea of allowing Greek government bondholders to take losses, which caused huge yield spikes for Spain and Italy from which they have not recovered. Now it proposes the same experiment with bank bondholders. Let’s see if it works better this time.

I do not see how, if this policy is adopted and rating agencies react, that this will not permanently close the debt markets to weak eurozone banks. Indeed, the bond market has already punished such dodgy names as Bankia and Caixabank in Spain, Unicredit and Monte dei Pasche in Italy, Dexia Credit Local in France, and HSH Nordbanken in Germany.

Ending TBTF would mean that the only remaining source of refinance for weak European banks would be the ECB.

One might have thought that the object of policy would be to (1) recapitalize all weak banks; and (2) draw a safety net around these banks, such that they would be viewed as creditworthy by creditors. It would appear that the current object of policy is to do too little too late about solvency, while signaling to creditors that they are at risk. Stop me if I’ve said this before, but these people have a deathwish.

Fiscal monetization and the shibboleth of central bank solvency

There is only one institution with the resources to save the eurozone, and that is the central bank. Only a central bank has unlimited resources in domestic currency. Yes, the ESM can be granted a banking license and then borrow without limit from the ECB if you are looking for a clever end-run around the ECB’s charter, but that’s a gimmick. Either way, it’s the ECB’s money.

The eurozone can be saved with the combination of 5-6% nominal growth plus yield-targeting for eurozone government bonds. The ECB can target 5-6% nominal growth by engaging in asset purchases until such a growth level is reached. This would allow most eurozone governments to balance their budgets (if they so choose). The ECB can also set yield ceilings for the bonds of compliant governments, such that their current level of indebtedness can be made sustainable and thus, et voila, no more crisis. Thus, all of the PIIGS except Greece could be saved. (Greece can’t be saved except by outright philanthropy.) As I have explained before, if yield-targeting results in excess money-creation, this can be sterilized by the issuance of “ECB bonds”.

The consequences of these two operations would be above-target inflation (which is desired) and a substantial decline in the asset-quality of the ECB’s balance sheet. The ECB would be directly exposed to the creditworthiness of its member governments, some of which are already below investment grade.

Let us assume that, by taking on these credit risks, the ECB’s solvency is threatened. Although central banks do not mark to market, they are exposed to delinquency and default, as well as outright repudiation, as will occur in Greece. This is, we are told, why the ECB cannot rescue the PIIGS: because it will endanger its solvency and “credibility”. Should the EU lose credibility, the euro will lose credibility as well. However, none of this is, in fact, true.

Many German commentators (and officials) have used the ECB’s solvency as a rationale  to oppose fiscal monetization.  This is always stated as a truism without a shred of evidence adduced in its favor.

Central bank solvency is meaningless. In granting the central bank the monopoly of the issuance of fiat (paper) money, the government has granted it a license of inestimable value, the license to print money. The value of this license is not capitalized on the central bank’s balance sheet. Like the value of the Coca-Cola brand, it is an uncapitalized intangible (not even footnoted). Thus, should a central bank happen to write down its assets by an amount greater than its capital, precisely nothing has happened because it can still print money. Does the Fed have a unit that performs the credit analysis of its principal foreign counterparts? No.

This would not be true, however, of central banks that make promises in commodities they cannot print, such as gold or foreign currency. Under those conditions, an analysis of their “cover” ratios is warranted. But if the bank is only printing its own liabilities, its resources are as irrelevant as they are unlimited.

Therefore, those who promote the falsehood that central bank solvency is necessary to the bank’s credibility, are using mythmaking to promote a different agenda. If the eurozone is to be saved, the ECB's solvency can be sacrificed without consequences.

The Fed's lame excuses for high unemployment

Below is my reaction to the release today of the minutes for last month’s FOMC meeting. Once again, they have an Orwellian (or Japanese) tone:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment...The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate.  

First, Fed tradition requires the FOMC to bow to Mecca and intone that it “seeks to foster maximum employment”, in the same way that the city of Sverdlosk committed to meeting the goals of the 10th Party Congress, and the Archdioscese of Cincinatti seeks to promote greater holiness in the tri-county region. The words are cant, devoid of any practical meaning. A layman, uninitiated in the Fed’s secret rites, might imagine that a mandate to foster maximum employment would mean that the Fed would be obligated to target maximum employment, but he would be wrong.

Permit me to translate Fedspeak into English: “The Committee is in favor of maximum employment, thinks it’s an absolutely wonderful idea, and will keep doing the kind of things that it’s been doing which, it is hoped, will over an indefinite time horizon, increase employment”. The mandate is not to achieve full employment, but to bow humbly in its general direction.

Then, for the rest of the meeting, the FOMC engaged in a lot of hocus pocus about the yield curve, the low interest rate policy, swapping short paper for long paper, and worrying about whether low interests rates are hurting banks. Not once does anyone say “Gentlemen, we’ve been missing our employment mandate for almost four years; let’s talk about targeting our mandate”. That would produce an “awkward silence ensued” comment.

I do not mean to imply that Chairman Bernanke is not a good economist, or that he is unfamiliar with criticism such as mine. It’s not an intellectual failing; it’s a political one. When he was a Princeton professor, and even when he was a Fed governor, he was free to say similar things. But now that he is the pope, he has a different job: maintaining the Fed’s “institutional credibility”. This is analogous to Chief Justice Roberts’ job: to protect the institution and its authority.

Not only would targeting full employment require FOMC consensus, which isn’t there, but it would also require broad support from the economics profession and the relevant Congressional committees, such as the Monetary Policy subcommittee chaired by Ron Paul. So whatever Ben believes in the privacy of his own den, when he’s at work his job is to promote broad consensus both within and outside the Fed.

In 1933, there was near-unanimous consensus that the US needed to slash government spending in order to maintain the gold standard and the “credibility” of the United States. During his campaign, FDR said as much. But once he entered the Oval Office and saw the devastation being caused by deflation, he took the advice of some prairie college radicals and freed the dollar from gold, causing a sustained inflation (price-level targeting, as we call it today). He had so much power and authority at that moment, and things were so bad, that he could get away with something that would have gotten anyone else impeached.

The times today are not yet analogous, and Bernanke doesn’t have quite the authority that FDR had in 1933. But the issue remains the same: what are you targeting and how do you plan to get there?

The crucial distinction between manipulating inputs (interest rates, QE) and targeting outcomes is that the amount of input is not under discussion. When FDR decided to raise the price of gold, he had no idea what he was doing. Each morning he would arbitrarily set a new, higher price until he achieved his goal, which was higher commodity prices. He was targeting outcomes, not inputs. His more orthodox advisers were appalled.

The same policy should be pursued today. Since the Fed has conceded that the risk of inflation is very low, then it has no excuse not to target full employment. Better still, it should say so very loudly. The FOMC should announce that the Fed will engage in asset purchases until employment is restored to its 2007 level. Period. That is similar to what Bernanke repeatedly told the BoJ to do ten years ago.

But Ben will have to decide whether he is prepared to risk not only his own credibility, but that of the Fed itself. The Fed’s statutory independence is a creature of the government’s will. Given how many monetary nutcases there are now on the right, and given that the GOP might get full control of the government, he may decide that the Fed’s independence is more important than full employment. I could certainly understand that calculus.

I don’t mean to be cynical, but I would not be surprised if the GOP were to change its monetary tune were it to get control of the government in November (as happened to Nixon). I have been informed that, in his heart of hearts, Romney gets monetary policy. I certainly hope so.

The ECB is guilty of malpractice

There is a theory (known as market monetarism) that central banks can control nominal growth. Predicated on the Quantity Theory of Money,  it asserts that the central bank, by controlling M (with V assumed to be within a bounded range) can control nominal GDP*.

Politicians can tune up the engine and improve efficiency (the supply side), but they do not control the throttle (aggregate demand); only the central bank does.

If one steps back and looks at the developed countries today, what is the #1 problem that they all have in common? Answer: low nominal growth, resulting in inadequate employment and tax revenue.

Global nominal growth levels have been falling for thirty years. During the non-recessionary years of the Clinton-Bush era, the US enjoyed nominal growth of >6%%. Today, post-crash, the US remains stuck in second gear at 4%, which had been considered recessionary.

Southern Europe, which used to enjoy modest nominal growth, now has zero nominal growth almost four years after the crash. To paraphrase a prominent market monetarist, you can’t have 5% real growth with 0% nominal growth.

I will now introduce a derivative thesis, which is that fiscal deficits are not primarily caused by the government’s failure to raise taxes and cut spending, but rather by inadequate nominal growth. This is certainly true of the world today. Nominal growth and nominal government revenue growth are historically quite low for a “recovery”, causing high unemployment and fiscal deficits. Higher nominal growth would automatically translate into lower deficits and lower unemployment.

Obviously, real growth is not a linear function of nominal growth, any more than agricultural output is a linear function of rainfall. There can be too little, just the right amount, or too much. It appears that, for modern economies with inflexible labor markets, low nominal growth is not enough, 5-7% is just right, and double-digits is inflationary. Right now, no major developed economies have nominal growth in the optimal range, and most are far below, especially in the eurozone.

The market monetarist theory is potentially Copernican in its implications. If accepted intellectually, it means that fiscal policy is much less important than previously believed, and that central bank policy alone can create or retard growth. It also means that the single central bank mandate of “price stability” is inadequate, since it can be satisfied with very low nominal growth.

We could profitably discuss the Fed and the BoJ in this context, but right now their economies are not on the verge of a collapse. That would be the eurozone, where monetary policy will make the difference between survival and depression.

Today, the ECB has one positive mandate (price stability) and one negative mandate: no fiscal monetization, even if governments cannot otherwise finance themselves.

The evidence suggests that the ECB’s governing council is not divided on this issue. They all would appear to agree that not only do they have only one mandate, but also that there should be only one mandate. Although the Fed has a growth mandate, the ECB doesn’t have one and doesn’t want one--not even now, with the eurozone in extremis.

Draghi told the European Parliament this morning (July 9th) that "I think to have one mandate is already so difficult that to have another would make our life even more impossible”. God forbid that one would want to make the ECB council’s job more difficult, what with all the other important things that they have to do, such as picking out the drapes for their new conference room.

If central banks control nominal growth, and weak nominal growth causes unemployment and fiscal deficits, then the ECB’s governing council and its chairman are guilty of monetary malpractice (which goes beyond nonfeasance since it is deliberate). This is not about arcane technical issues; it is about millions of lives and the futures of nations. The ECB council cannot shirk its moral duty because it is too busy, or because unorthodox monetary policies are “risky”. What we know for certain is that the ECB’s orthodox policies are not only risky, they are suicidal.

If the eurozone is to be saved, it will require a responsible central bank. To stay in the zone, Southern Europe will need at least 5% nominal growth as well as fiscal monetization (yield targeting). These goals are compatible. If fiscal monetization expands the monetary base too quickly, the ECB can mop up excess liquidity up by issuing its own bonds and thus limit the impact.

This would require a decision to amend or ignore the ECB's charter, just as the eurozone has ignored the fiscal and debt provisions of the Maastricht treaty. Such treaties were made to be ignored when necessary. The ECB can provide the eurozone with adequate nominal growth while limiting government bond yields, if it so chooses.

It would be one thing if the ECB council attributed its helplessness to its charter; it is quite another when it explicitly asks that its charter not be changed. That’s the criminal part.
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*The “market monetarist” thesis* is a derivative of the classical Fisherian quantity theory of money, which can be summarized as M x V = P x T, or (Money supply) x (money Velocity) = (Price level) x (real economic Transactions).

If V (velocity) is held within a bounded range, then changes in M can bring about changes in P x T, which is nominal GDP. Therefore, the central bank, by controlling the quantity of money in the economy, can control the level of nominal GDP (NGDP).

Scott Sumner’s seminal paper on market monetarism:
http://www.nationalaffairs.com/publications/detail/re-targeting-the-fed

France deathwatch

There is a good bit of anticipatory gloating and schadenfreude about France in conservative anglosaxon circles.

We enjoy the spectacle of the French people electing a socialist government in the midst of a sovereign debt credit crisis. We are excited by the new government’s array of taxes which will throttle any prospect of animal spirits in that lovely country. We are amused by the government’s new law against plant closings. We await impatiently the inevitable “missed” fiscal targets, the “unexpected” decline in revenue and the “unexpected” rise in spending. We gnash our teeth at  the bond market’s dereliction, refusing to rise up and do to France what it is doing to Italy and Spain. But we know, in our heart of hearts, that France is going down.

No one wants to see Hollande fail more than I do. But I have to be honest: it isn’t really his fault. Yes, of course raising taxes and cutting spending may help to keep the bond market happy, but it will not succeed; France is going down.

Thanks to the wonderful folks at the St. Louis Fed, we can readily access French financial and economic data in God’s own language. The picture isn’t pretty. Yes, debt/GDP is headed in the wrong direction, and yes, the public sector is gigantic. But that’s not the problem. The problem is nominal growth (real growth plus inflation). Nominal money is the currency in which the world does business; “real” money isn’t real.

France’s nominal GDP growth is dangerously inadequate. Having fallen to -4% during the crisis, it crawled back to 2% and is now falling once again. Right now it’s at 1.5%, and falling. No country can prosper and maintain fiscal balance without better growth than that. Since EMU, NGDP growth has ranged from 3% to -4%, with an average that is way too low.

NGDP growth of 1.5% necessarily limits government revenue growth to ~1.5%, and it is not possible to run a socialist economy on that level of growth. Yes, Northern Europe has done so. But Northern Europe has already reformed itself, and shed an awful lot of socialist dead weight in the process.

France has not reformed itself, and just voted for more left-wing utopianism. To live in a world of very low nominal growth requires heroic budget discipline and flat real wage growth. It requires docile labor unions and public-sector layoffs. It requires an efficient private sector that can restructure itself to compete despite a strong currency. That France doesn’t have.

France needs at least 4% if not 5% NGDP growth to start digging out of its hole. Hollande could usher in his socialist paradise if he had that kind of growth. But he’s not going to get it, the way things are headed. France is going down, but he is too dumb to know it. (Has he ever bothered to read an American economics textbook?)

France needs inflation now. There are only two ways to get it: eurozone exit or a change in the ECB’s mandate. France is not going to leave the eurozone prior to its default, which leaves the ECB charter. The problem there is that the charter treaty can’t be changed without a unanimous vote of the 17 eurozone members, and the North isn’t buying it.

That means that France faces a future of anemic growth, continuing fiscal deficits, rising debt ratios, riots (of course) and, at some point, a bond market revolt. The ECB will do everything it can to prevent a sharp rise in French bond yields, but it is limited by its “no fiscal monetization” charter. That is why I expect France to go down, probably at the end of next year, when the fiscal targets are “missed”.