French fear of markets stirs presidential campaign
PARIS (AP) — News that foreign investors would be allowed to take bets on French debt has been greeted with cries from the country's politicians and media that a "weapon of mass destruction against France" had been unleashed in what amounted to a "financial coup d'etat".
The frenzy over what was actually the launch of a new futures contract highlights how widespread the fear and misunderstanding of free markets is in France, where leftist ideas have a strong foothold across the political spectrum. Both this fear and apparent confusion will drive many voters' decisions in presidential elections starting Sunday. The decisive second round is May 6.
Futures contracts — basically, agreements between one investor and another to buy or sell a product at a specified price and date — give investors an opportunity to spread out their risk by allowing them to hedge trades. They generally make the market in that asset more liquid, which should help that market, in this case, French debt.
That this futures contract was born in Germany — unsurprising, since Frankfurt-based derivatives exchange Eurex is the largest in Europe — elicited nationalistic chest-beating against outside interference.
Add into the mix that it started trading Monday, just days before the first round of France's presidential election, and you have a wave of "Wag the Dog" conspiracy theories that President Nicolas Sarkozy was soliciting instability in order to press home the message that the country needs a firm, experienced hand on the tiller.
The idea that either the French or German governments must have had a hand in launching the futures contract kept cropping up. Socialist candidate Francois Hollande, who is leading most polls, even said he would ask German authorities to ban the instrument. Germany's financial regulator says it has no such power.
Finance Minister Francois Baroin was finally forced to put out a statement saying that the "decision by a private, foreign operator to launch a derivative contract on French debt does not require the prior authorization of a French or European regulatory authority."
It may have seemed an obvious point, but one that many here found hard to believe.
In reality, the futures contract appears to have had little effect on France's cost of borrowing and volumes remain very low. And it is hardly a radical product; similar ones already exist on Eurex for German and Italian debt.
In France, a politician can say he doesn't like rich people and is in a battle with the world of finance — and be on track to become the next president. That's Hollande, who is the least radical of the five leftist candidates.
All five want to raise taxes, including some who would confiscate all income above a certain level. One wants to unilaterally cancel France's debt. Two would ban layoffs.
Even the far-right candidate, Marine Le Pen, is calling for an across-the-board raise for workers making near the minimum wage. Not to be left out, conservative Sarkozy has hammered companies on executive pay and has declared that France's calling is to be the "spokesman for all in the world who wish to see that man is not sacrificed to commerce."
Market-bashing in France is often an easy option for politicians, an uncontroversial way to please a crowd of any political stripe.
Perhaps because they are so often painted as bogeymen, markets appear to be widely misunderstood in France. The debate over the new futures contract revived two contradictory beliefs: One, that markets are tyrannical forces that must be kept at bay. Two, that free markets don't really exist — that the state always has a heavy manipulating hand in them.
The reality, of course, is that France is a major, modern country that needs — and makes ample use of — the markets to fuel its economy. Hollande opened himself to ridicule from the right when, in the middle of the brouhaha, he declared that there would be "no place" for markets in his administration and that the French people would not allow a "dictate from outside" to be imposed on them.
Sarkozy quickly mocked these statements as an utter misapprehension of the real world, but he also evoked one in which France could live outside of the demands of the markets.
"If you don't want take notice of the markets, pay down your debt, reduce your deficit and you won't need someone to come to lend you money," he said.
It's true that countries with high debts and deficits are more at the mercy of investors, who can demand premiums to lend to them thus making it harder and harder to pay back the debt. But all modern economies issue bonds — which are essentially debt — to raise money. While France has seen the amount it has to pay to borrow money rise slightly recently, it still pays a relatively low rate of around 3 percent.
That has allowed it to even make money on some of its debt, by turning around and lending to banks at higher rates, analyst Marc Touati noted this week.
Touati himself has ridiculed the fear of markets and the facile way in which politicians describe them as "attacking" France and even its democracy.
"We must remember that it's not the markets, not the speculators that asked the French state to inordinately increase its spending, its deficit, its debt. No, France arrived at this point because its political leaders decided these things," he said in a weekly note addressing the question — frequently thrown around in French media — of whether the markets would attack France if Hollande wins.
Touati, who is the chief economist at investment company Assya, says markets may turn on France regardless of who wins, if the next president doesn't slash spending and overhaul the economy.
"Thus, it's not the markets that will attack France, but the French who risk fashioning a baton so they can be hit on the head," he said.
Associated Press writer David McHugh contributed to this report from Frankfurt.