In memory of Dr. Andreas Höfert

On Sarkozy, Spain and Socialists

| Tags: Andreas Höfert

As the French presidential election enters its final stages, the rhetoric has sharpened between incumbent president Nicolas Sarkozy and his socialist challenger François Hollande. Yet for all their efforts to distinguish themselves from each other, the two front-runners are united in their refusal to acknowledge some hard truths about the dire state of the French economy.

The French presidential campaign has exhausted French voters and outside observers alike, not least because of the bizarrely empty debates between the candidates. As renowned British magazine The Economist put it, France is showing itself to be “a country in denial” about its economic challenges.

Sarkozy added yet more controversy to the mix last week, lumping Spain’s economic troubles together with the situation in Greece, warning voters that “the current situation of our Spanish friends, after the one experienced by our Greek friends, reminds us of the realities.” He even went on to imply that left-wing politics is to blame for the Spanish economy faltering: “Look at the situation in Spain, after seven years of Socialist rule.”

Making “the Socialists” responsible for the present crisis in Spain is obviously a drastic shortcut. But what is even more striking is how strongly his remarks embody the typical French belief that the government is responsible for everything that happens to a country, no matter what. Hence, if there is a crisis in Spain, the government must have caused it.

Sarkozy’s claim is wrong on many levels. First of all, Spain simply is not Greece – regardless of how much jittery markets have been playing havoc with Spain’s sovereign bonds this week. Greece systematically breached the Maastricht fiscal criteria between 2002 and 2007, while Spain ranked among the most fiscally frugal members of the European Monetary Union before the financial crisis. Spain consistently upheld the Maastricht rule on government deficits between 1999 and 2007, even posting surpluses in 2005, 2006 and 2007. It also reduced its public debt-to-GDP ratio from over 50% in 1999 to only 30% in 2007.

France’s fiscal situation, on the other hand, actually compares unfavorably to that of Spain in the run-up to the financial crisis. Looking again at the years between 1999 and 2007, France failed to meet the Maastricht public deficit criteria four years in a row – from 2002 to 2005 – and barely maintained its public debt-to-GDP ratio at 50%. Today, France’s public spending hovers above 55% of its GDP, while in Spain this figure is currently just above 40%. The current Spanish debt-to-GDP ratio of 70% is also lower than France’s ratio of almost 90%.

These figures demonstrate quite clearly that the Spanish crisis was not caused by a profligate government. Instead, it was caused by the low interest rates the country experienced after the introduction of the euro. These low rates led to massive indebtedness among the Spanish population, fueling housing-market and credit bubbles that make their US counterparts look tiny by comparison. Now that the bubbles have burst, Spanish house prices are 15% below their first-quarter 2008 peak. If we take the US as a blueprint, another correction of 20% looks plausible, along with all the negative consequences this would have for the distressed banking sector.

But now look at France: House prices there made a similar rally, increasing 75% in the five years before they peaked. French prices also declined following their peak, sinking 10% within a year and a half, but now housing prices are roughly the same as they were at the beginning of 2008. If France comes to experience a decline of house prices similar to Spain’s, its rather dismal fiscal statistics suggest that its situation could become at least as bad as the Spanish one – regardless of whether socialists are running the country.