The claim
“Great Britain is in a very difficult economic situation, a deficit close to the level of Greece, debt equivalent to our own, much higher inflation prospects and growth forecasts well under the eurozone average.”
Francois Baroin, France’s finance minister, 15 December 2011
The background
La France is staring down the barrel of a credit downgrade, and is showing very little grace under fire.
France’s finance minister Francois Baroin and Christian Noyer, the head of the Bank of France, have blasted credit agencies for reassessing their AAA credit rating, telling them to look across the Channel at us instead.
“One would rather be French than British at the moment,” Baroin said.
FactCheck knows the situation is bleak, but does Britain deserve the cold shoulder from France or should we issue them a Gallic shrug?
The analysis
Baroin picked off four specific economic ailments:
Deficit
We are borrowing considerably more money than France this year. The UK is currently borrowing 8.8 per cent of gross domestic product (GDP or national income), according to the International Monetary Fund. This is projected to dip to 7.9 per cent in 2012. France meanwhile is running a deficit of 5.9 per cent, which the IMF expects will fall to 4.4 per cent next year.
Debt
The UK’s debt level is currently slightly lower than in France; 82.4 per cent of GDP versus 85.4 per cent across the Channel. But it is actually forecast to overtake France by 2013, rising to 92.5 per cent, while the French are expected to grapple with a slightly lesser debt pile of 91.7 per cent.
Inflation
The IMF’s Economic Outlook last month put the average CPI inflation in the Euro area at 2.5 per cent this year. In the UK, CPI is 4.5 per cent, much higher than France’s 2.1 per cent. And while the IMF expects inflation in the UK to drop to 2.5 per cent next year, that’s still higher than their prediction of 1.4 per cent for France.
Growth
Nil points to Baroin on this one. Last month, the Organisation for Economic Co-operation and Development (OECD) cut its forecasts for UK growth during 2012 as a whole to just +0.5 per cent, from +2 per cent before.
However this puts us ahead of the French – who are expected to see 0.3 per cent growth in 2012. And it sets us ahead of the predicted eurozone average – which the OECD predicted would expand by a tiny 0.2 per cent in 2012, after beginning the year with a recession. In a bleak warning, the OECD outlined a worst-case scenario of the eurozone economy shrinking by 2.1 per cent in 2012, and a further 3.7 per cent in 2013.
The verdict
It’s 3-1 to France – so Monsieur Baroin is right, to an extent.
But France’s finance minister didn’t stop there. “They should start downgrading Britain,” Baroin argued. And even the head of the Banque de France, Christian Noyer, said we should lose our AAA rating before France does.
Is that fair? Downing Street doesn’t think so – Number 10 says international bond markets have more confidence in Britain than France.
And they’re right – if you look at the yield on 10 year government bonds, it is currently 2.1 per cent. By comparison, France’s 10 year government bonds yield stands at 3 per cent right now. This means the cost of their debt is 50 per cent more than ours.
What’s more, Britain’s banks clearly don’t think France is worth the risk – Bank of England figures out today show they pulled £18.9bn out of French bonds between July and September, and invested in Germany and the Netherlands instead.
Or you could look at the cost of insuring the UK against going bust – through credit default swaps (CDS) spreads – which currently show we’re a less risky bet than France.
Why are we a better bet? We have our own currency that can fluctuate up and down, and we set our own monetary policy.
And we won’t have to stump up the cash to bail out Europe – which could push up taxes in France and lessen their ability to pay off their debt.
By Emma Thelwell
The ability to control our own currency is the key. That gives us the flexibility to effectively avoid bankruptcy in all but the most desperate of circumstances.
France chose to abrogate their control to the ECB, and, by proxy, to Germany. And that is why they’re in a greater mess than we are.
Is the possibility to devaluate the Pound a real avantage ? What kind of damage a devaluated Pound would do to the Brits in a country which is importing so much ?
Rocketing inflation with unaffordable food prices and little exports benefits because the UK is not a big industrial exporter.
Hello Pierre Gonzalez,
Many analysts assess over or under valuations by reference to either Purchasing Power Parities or from the balance of trade sustained by that value.
During the late-90s the GBP became over-valued on both measures @ 1.65 Euros = £1. Since then, the GBP has fallen in value to 1.19 Euros = £1. A fall of 28%.
France is not a big industrial exporter either and gains the majority of her revenues from services, as do many OECD States.
Does it matter that Switzerland exports a lot of vacations and financial services? If it does matter, Switzerland would be a very poor nation. But neither France nor Switzerland are noticeably poor.
No one believes French official figures or that their banks are anything but broke?
You should start by checking the UK official figures because a lot of debts are not included.
And the UK banks needed to be bailed out and in fact nationalized to avoid bankruptcy which is not the case of the French ones who passed from taking ( until now ) money which was available from the French Central Bank.
Exile Napoleon Sarkosy to St. Helena!
See Robert Peston on the BBC website for more detailed reasons why we’re currently less at risk than the French. The reali question is whether our relatively loose monetary policy will offset the crunch on the rest of the economy or whether in 2 years’ time we’ll feel that the Germans & French took better long term decisions.
I am still waiting to see the proof that printing huge amounts of money that we did has been generating any benefit in terms of growth or jobs.
Are the French right? – Its academic according to various sources as we are already in recession, govts all looking in the wrong place to solve the global crisis AND heading for a depression worse than the 30s….
Steve Keen – Hardtalk in November…. PRIVATE DEBT is the problem
Various economists (mostly female i am pleased to say) – Newsnight this week…. PRIVATE DEBT
LaGarde – Her IMF statment last night….. DEPRESSION loomimg unless we solve the Euro problem.
When will C4 cover the macroeconomic causes of the problems rather than talk about the effects?
No one mentions the elephant in the room: the central bank as a lender of the last resort. We have one the Euro zone countries do not and that is the difference. All this talk about who is more austere than who is nothing more than lies when you have a bank that can bale you out at any time. The rating agencies are acting politically they want the European Central Bank to act in this way.
Lets have some objective discussion instead of points scoring!
Cathy/Emma,
The only use for this piece is to get some fun out of one set of useless apparatchiks beating up on another set of useless apparatchiks.
They might as well throw custrad pies at each other for all the difference it will make.
Please Cathy , ou can’t be serious about the growth numbers !
Plus 0.3 or plus 0.5 doesn’t make any real difference ; they are both almost stagnation !
And they can be both be reversed very quickly.
So what it all comes down to is the banks and the markets GAMBLING with everyone’s future prosperity. If they think as a country you are a good bet, your credit rating remains good and your interest payments remain low but if someone decides that they don’t like a speech or a decision in government they bet against you and the country goes bust. Who is really running the world? Markets and Banks certainly have more control over the actions of our politicians than voters do.
Fully agree with you . If Greece was in a real trouble , I still don’t believe that Portugal needed a bail out if the rating agencies would not have been pushing for it !
Why do the do it ? because it helps some of their friends playing with SWAPS and who made billions of Dollars of profit by creating misery for millions of citizens.
We’re safer out of the bottomless pit of eurofinance, but still exposed to the effects of US/UK banking’s predatory activities (that’s a polite euphemism) that caused the crash in the first place.
General Motors Finance and General Electric Finance started the credit crunch which spreach across the prairies in America and Europe. Goldman Sachs formerly Goldman hide the Greek debt and most other debts for a price and the weak followed.
The more finanacially sound countries like France & Germany pay off some and hide some. The innocent middleclasses like Holland Sweden, Hungary and Poland are being made bail the dishonest rest out.
The reports also ignore the levels of private debt. Private household debt is so much higher in the UK. Private household debt in France is only 44% in the UK it is over 103%.
So if you add government, non financial business, household and financial sector debts the UK has a total of 466% total debt to GDP, whereas France has only 323% Total debt to GDP.
So the UK is in a worse state apart from the fact that it issues its own currency, which it can devalue. France as a currency user has that immense burden to bear.
EDF is a 66 bln euro company that is in 57 bln euros of debt. 30bln to their own pension. Sociele General is in 5 Trillion euros of debt no wonder Lloyds did not want it.
France is in the Euro and carrying a major load for that reason, but its economy is not actually at risk in the same way as Britain’s, since the Euro will defend France in its turn, which no one will do for the UK. They are right to think that the judgement on them is mistaken and unfairly favours Britain. This is going to get truer and truer as the shakeout continues.
The blackmail needs to Stop as each country
is been far to greedy in the last 18 years.
Spending so much of how own money on not what
citerzens would exspect from MP.
Osborne keeps clinging on to our lower bond yields as (the only?) proof of his sound economic policy. How much higher would they be if BoE hadn’t Quantitatively Eased an extra £275bn of demand for UK bonds, thus distorting the true market equilibrium?
Hello Andrew ,
the main strength of the French economy is a strong domestic market , helped by higher disposable incomes like higher pensions and higher job seekers benefits.
This is explaining the difference in deficit with Germany where they don’t care so much about it because their economy is based on industrial exports.
This is why I don’t see very much the interest for France to stay in the Eurozone.
Would people stop buying French products if they would be sold in Francs? This surely would not affect luxury products or food; it would not affect either the Airbus business or the fact that many towns close to the French border buy nuclear electricity for EDF.The same apply to the sale of nuclear plants.
It would not affect either international business of companies like AXA .
So why risking the AAA rating to bail out other countries remain a mystery for me , unless it is all about Mr Sarkozy dreaming of political gain before the elections.
The funny thing is that Germany who is the main beneficiary of the Eurozone is the country showing a limited enthusiasm to save it.
Ian Harris , what you are saying is just non sense!
EDF has debts because they are building new nuclear plants and borrowing money to do it. Do you prefer the British Gas system which consist in overcharging customers to generate the money they need for future investments!
And as far as Societe Generale , I don’t know where you found that kind of rubbish!
Societe Generale is making profits even after making provisions for the Greek bonds!
But Lloyds is surviving with tax payers money !!!
Hello Pierre
I like all our neighbours and appreciate that each nation perceives their philosophies of economics in different ways.
Falling out with the neighbours’ is usually a bad strategy. Better to look out for those characteristics we admire.
I wish the respective political leaders would do that too.
hello andrew,
In Bruxelles recently most adult politicians representing sovereign peoples did precisely that, respect one another and cooperate to deal with common and shared serious problems. only cameron behaved as though it was a battle, which he won by reducing britain to an irrelevance. the world however moves on
Thank you Paul. This is going to be a very tough 3+ year transition as each Euro-zone nation has to change their ‘common-sense’ way of managing their economies. That will not be easy and we’ll all need to retain our good humour. As you do!
I note that ‘the sky did not fall in’ when the Euro-Council did not agree the big bazooka that the US & UK had advised. And ECB did something rather different. Perhaps there’s a lesson in that?
My God, you can see how the British hating Europhiles have hijacked this thread can’t you. You’re all so full of bile that you can’t see the truth. The Euro is finished!!! Can’t wait for it either.
French economy is beating Britains because we have politician who don’t live in the real world like the rest of us. Brazil’s economy is better than ours and will soon be better than France’s.
France has hidden debts in part state owned companies. EDF had to but British Energy to keep EDF afloat. It is a 66 Billion euro company with 57 Billion euros of debt.
France still owes us for saving their arses in two World Wars while they said “Yes Boss Heil Hitler”
Hello Ian Harris,
Are you sure you really want to put your awful slogan “Yes Boss Heil Hitler” to your name?
Don’t you know the history of our neighbours and ourselves?