Francois Hollande and the Flight of French Capital
by Alexander Green, Investment U Chief Investment Strategist
Monday, May 7, 2012: Issue #1767
Francois Hollande’s answer to this budget crisis? Still more spending and a proposed 75% tax rate on job creators.
Winston Churchill famously said “You can always count on Americans to do the right thing – after they’ve tried everything else.” Now we can say the same about the European Union.
Global financial markets are down sharply this morning in response to election results over the weekend. In France, French Socialist candidate Francois Hollande narrowly squeezed out President Nicolas Sarkozy and his unpopular austerity measures.
Yet Hollande insists his campaign was not about the incumbent. “My real enemy,” said the President-elect, “is the world of Finance.”
He has chosen the wrong antagonist.
Governments can control fiscal policy. They can control monetary policy. But they cannot control financial markets. French voters have voiced their opinion about Hollande. And now financial markets will voice their opinion of him.
He’s not going to like it.
We’ve all the heard the nattering between economists about Europe’s choice between austerity or growth. Stronger countries, like Germany, want southern members of the Eurozone to demonstrate fiscal responsibility and cut out-of-control spending. But the citizens of these countries – especially Spain with its unemployment rate of 25% – want jobs. They want growth.
Fortunately, austerity and growth are not incompatible. Unless you believe it’s achieved through still more reckless spending and painful taxes on risk takers.
Recognize that France already has one of the highest overall tax burdens, yet it continues to bleed red ink. Debt is 90% of GDP. Trillions in unfunded pension and retiree health-care obligations loom in the not-too-distant future.
Hollande’s answer to this budget crisis? Still more spending and a proposed 75% tax rate on job creators.
To be sure, this has populist appeal among some voters, especially those who believe national governments are giant candy stores funded by millionaires and billionaires.
Let’s set aside the obvious folly of piling new debt on top of old in the midst of a fiscal crisis. Entrepreneurs and other business owners – being rationally self-interested like the rest of us – will take every step imaginable to avoid a punitive 75% tax rate. Many, in fact, will choose to take their money out of the country – or not invest it at all.
A businessman or businesswoman under a high-tax regime always does a simple back-of-the-envelope calculation. It goes like this: If I start or expand my business, I will face the risk of substantial losses for which I will be solely responsible. But if through hard work, enterprise and a bit of luck I beat the odds and succeed, the government will take up to three-quarters of what I make.
Many will choose to punt. Their businesses will not be expanded. The unemployed will not be hired. Tax revenue will not be raised. Economic growth will not expand. And neither will corporate profits. That bodes ill for Europe’s equity markets.
And it gives us a foretaste of what lies ahead in the United States if our so-called leaders in Congress don’t get their act together. Politicians on both sides of the aisle don’t want to confront the reality of our unsustainable budget deficits. Yet, ultimately, financial markets will force them to. As you can see today, the purple thunderheads are gathering.
It’s funny how words and expressions enter and leave the language. A few years ago, for instance, no one had heard the phrases “Great Recession,” “the one percent,” or “the Arab Spring.”
Want to know my prediction? You’ve already heard the last U.S. economist or politician say he favors “the European model.”
Good Investing,
Alexander Green
Francois Hollande and the Flight of French Capital,Any investment contains risk. Please see our disclaimer.
14 Responses to “Francois Hollande and the Flight of French Capital”
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I applaud the article. Socialism has never worked at any time in the history of the world and it has not worked in Obama’s socialist/Marxist government.
Just look at his abysmal record:
*Anemic job creation (3.9 million vs. Reagan’s 9 million!)
* $5 trillion in new US debt in less than four years;
* The confiscation of bond holders (pension funds, Grandma and Grandpa’s dollars) in GM and Chrysler handed over to the Unions and his Chicago mob.
And much more.
So why is Guantanamo still open? (Thank God!) He promised to close it in his first 12 months? Oh…I forgot “he” killed OBL. Ask the Seals!
That’s it for now. You know the score…its our freedom or his imperial Presidency! Its your choice in November.
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I see the same as far as Europe goes, so does the
walop to get free of debt with taxing.
The digital age is here but the minds are far behind.
When China opens shop in finacials and their banking on Gold, will prove to be too much for any currency to walk the talk.
Lets get back to simple.
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The world is being run by people who are, quite literally, insane.
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Since the 14 years of Francois Mitterand Socialist Era, France was not able to recover from its wrong policies. The burden of taxes,the immigration from Arabic Country,the Union’s Power with continuing strikes, the degradation of the Educational System, had a huge impact on the lifestyle of the people.The Ederly and the poor people are suffering the most and the young are lacking the knowledge to be able to acquire a decent job.
The leaders and the money makers left the Country a long time ago leaving an agonizing Contry.
I am one of them and I hope that American people won’t be stupid to follow this disastrous path that will allow ISLAM TO TAKE OVER FRANCE.
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Just a tweeny bit racist. How is Adolph doing these days? Are you minding the shop for him?
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Name calling and labels do not change facts.
Simply look at the demographic data in France.
When two cultures meet (collide), it is the more vulgar one that survives. Importing a significant number of folks with a different culture is risky–at best. It is particularly “dangerous” if they congregate and band together and do not “disperse” throughout the society.
If you add a teaspoon of garbage to a barrel of soup, you get garbage. If you add a teaspoon of soup to a barrel of garbage, you get garbage.
Call if racism if you wish. Call it whatever you wish (the left is good with words), but look at the reality of the situation. Look at Denmark, where the projection is that Islam will “take over” the country by 2030–and that is their conscious plan.
always,
tony
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Bravo, Alex,
Your plain language, easy to understand critique of the potential results of the French election as well as the impending U.S. elections are right on. The country could use you and others who are simililarly great communicators to join the national debate. Is public office in your sights?
Keep up the good work.
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Economists?? All but Paul Krugeman!! Read his comments today!
Love to hear you and he debate!
I’m with you!!
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The article fails to recognize that bunesses need customers. Austerity should be reserved for wasteful allocations such as subsidies to oil companies. Businesses cannot survive without customers with pay checks.
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Progressives have been trying to impose the European welfare state on the United States for a hundred years.Politicians love to buy votes with other peoples money, and they keep getting elected. Maybe there is a sucker born every minute. We should know better!
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The free trade,globalization,and outsourceing of jobs,first to japan,then china,and then elsewhere are to blame.Elected by the people, these treasonists screwed the people that elected them. A proper hanging of all, is the solution.Place their heads on a stake for all to see.If it traverses the US and the world,so be it.
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I think you are completely wrong on this matter as you were on the markets reaction today.History has shown the best way to get out of recession is not austerity but more government spending. This will help job creation and turn the economy around.
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Barry Worshoufsky, Prove to me how when you are deep in debt you bail yourself out by spending money you don’t have. I know you use your visa card to pay your mastercard is a great plan but what do you do when the bills are due? I suspect you are a liberal or possibly a socialist. Please show me how history has shown this. Let’s see, Greece,Spain,Russia,Britian,Italy,France,Canada,Ireland,Sweden. All of these countries have or are now learning how your “plan” did not or will not work. Socialism does not work. Perhaps you should study the economic histories of the listed countries and you will see the reality of your plan. The list is not complete. I realize there ar probably more countries that I have missed but I think you get the message.
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Previous regimes, starting with Mitterand, have placed the French people into the toilette. They have merely elected Monsieur Hollande to pull the handle.
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