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Francestein: The Next European Shoe to Drop

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After Grexit and Spain comes the 'Francestein' French monster.

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In 1936, the French retirement system was brilliant and revolutionary. It was based on a shorter life expectancy and three or four workers per retiree. In 2012, the system rests on one worker paying for one retiree, expected to live as long as he or she worked.

All these factors, combined together, are the recipe for the conclusions found here and in The Economist article. France has not created growth above 5% since 1974; it has not had a balanced budget since 1976; it has not had unemployment (U3) below 5% since 1975 (U6 has not been below 15% since 2000). The GDP to debt ratio is worse than Spain's. French banks are loaded with Greek debt, and with bad investments. Actually, French banks alone should add 1% or 2% to 2013's U3 numbers – despite repeated promises by Hollande and his government to lower unemployment by the end of 2013. How will they do it? The same way they always did: By creating State jobs and civil-service jobs. With what money? Debt. More debt. More deficit.

So, after Grexit and Spain, Francestein is the next European monster.

I have long contended that if Europe were South America, France would still have the choice to become a success story, much like Chile, Brazil, Colombia, or Peru… or a nightmare, like Argentina. The 2005, 2008, and 2012 riots surely gave a preview of what could happen if France went the Argentine way.

But here is my conclusion: Due to its deep "father figure" complex, France can only evolve by going through adolescent bouts of rebellion. It needs the clashes, it needs the pain, and it thrives on the "national moments of unity" for reform -- like Spain, like Italy, and not unlike Greece.

So when will the tensions begin to boil over? I think we will see a repeat of 2011 and 2012 fears with May-June 2013 being particularly dangerous months. These will be the months when France will begin in earnest to face the brutal realities of speculative attacks on its broken debt-driven model. Truth is, the exact timing is up for speculation, but the situation is no doubt coming to a head. Note that Moody's downgraded France just yesterday from AAA to AA1, saying the outlook remains negative.

France will need more flexible labor, more dreams and ambitions for workers, and more access to mobile careers. It will need less State debt-driven wealthfare and benefits and less private initiatives for pensions and entitlements or it will risk becoming the Argentina of Europe… Francestein.

Twitter: @Alex_Salomon

This article was originally published on See It Market.
No positions in stocks mentioned.
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