N. Peter Kramer’s Weekly Column
The interest rate differential – the so called ‘spread’ - between French, Belgian and Italian bonds and Germany is widening rapidly. The French ten-year bond yield touched just under 5 percent the end of last week. Italy and Belgium are also in the firing line of the markets. A rapidly depreciating euro brings back memories of fifteen years ago, when the euro crisis was in full swing.
With government debt at 119 percent of GDP and a rising deficit of 5 percent of GDP, France is in the worst shape in the eurozone. The fear is that it is no longer capable of getting their budget back on track. Prime Minister Lecornu’s government wants to cut spending, but lacks a majority in the parliament. The violent student protests also demonstrate that there is little public support for further austerity measures. And then, there are next year’s presidential elections, which could turn into a duel between the radical left Mélanchon and radical right Marine Le Pen. Neither inspires confidence in the markets.
In the analysis of the mayor investments banks, Belgium and Italy are often mentioned in the same breath as France. Italy has a particularly high debt of 140 percent but the budget deficit, around 3 percent is under control. Belgium saw the spread rise sharply. Compared to Germany, the interest rate difference stands at 0,86 percent. Like France, Belgium is struggling with the toxic combination of high government debt and a budget deficit exceeding 5 percent.
In principle, the EU is better prepared than during the euro crisis. There was criticism afterwards that too long had been waited to intervene. Now the ECB is monitoring the situation with eagle eyes, but it is detrimental if the economic situation of the member states diverge too sharply. And what makes the situation more difficult this time, that the euro crisis of fifteen year ago mainly concerned small member states, such as Greece, Portugal and Ireland. Now we are talking about France and Italy, the second- and third-largest economies in the eurozone.
