In some parts of the financial market, it’s as if the euro zone debt crisis never happened. The gap between benchmark French and German bond yields this week shrank to its smallest since 2009, before the countries that share the single currency were hit by financial shocks that threatened monetary union itself. Such indiscrimination is premature, and stores up fresh problems.
French 10-year government bond yields on Monday and Tuesday were only 15 basis points higher than their German counterparts. That spread was more than five times as wide in February, when concern was rife that anti-euro far-right leader Marine Le Pen might win the Republic’s presidential elections. The fact that France is now in the vanguard of those who want euro zone members to have closer ties may partly explain investors’ appetite for its debt.
President Emmanuel Macron has called for the bloc to have a finance minister and budget of its own. Others, such as German Chancellor Angela Merkel, want to turn the euro zone bailout fund into a European Monetary Fund to monitor countries finances and, if necessary, lend to them. The European Commission on Wednesday published proposals to strengthen the euro zone that included elements from each camp.
Such plans may blind investors to the differences between the public finances of Germany, which has run a budget surplus since 2014, and France. The latter’s fiscal deficit has surpassed the EU cap of 3 percent of GDP every year since 2008 and may only just fall to that limit in 2017. Worse still, Paris’s structural budget deficit, which strips out the impact of economic cycles and one-offs, is barely falling while debt will rise to 96.9 percent of GDP in 2017 – well above Germany’s 64.8 percent, the European Commission reckons.
Such differences wouldn’t matter much in a true fiscal union but nothing so radical is likely. Germany will resist a substantial euro zone budget. And any European Monetary Fund will only be effective if it has powers to step on national governments’ toes. The idea of introducing a mechanism to allow sovereign debt restructuring may resurface, causing markets to worry once more about public debt levels. Investors who confuse France for Germany could face a rude awakening.
_______________________________________________________________________
Request a free trial of Breakingviews here.
