Overtaking (for future reference)

with an Italian public debt/GDP ratio 29 points higher than the French one in 2028, in April 2024 he saw it like this:

with a gap of as much as 30 points to 2029 due to an increase in the Italian ratio higher than the French one (which in October 2023 was instead considered stable).

It may well be that things go like this (in which case I would have been blatantly wrong), but in the meantime let's add another piece of information: what would happen if the public debt/GDP ratio of the two countries behaved from now on as it did during the suspension period of the rules (2020-2023)? This would happen:

that is, precisely, in 2029 (in five years) we would have returned to France (102% instead of 103%).

Let's be clear! This counterfactual has no meaning except, perhaps, to give us a very approximate order of magnitude of what the "cost of the rules" is for an economy like ours, an economy that has been massacred by the desired cut in public investments from Brussels and perpetrated by Monti, as we detailed here :

(even in France, which started from a higher volume of public investments, there was a cut, but of a proportionally smaller amount and substantially recovered at the end of 2022).

So I don't expect things to go that way. What I expect, however, is that things go worse in France than the IMF sees them, and I would even say slightly worse than they did under Hollande (from 2012 to 2017 the debt/GDP ratio increased in France by around eight points) , and symmetrically that Italy is doing better than the IMF sees it, and I would even say slightly better than it was before the global financial crisis (from 1995 to 2000 the Italian debt/GDP ratio fell by 10 points). In five years, such a recovery would close 18 of the 26 points of gap that we gave France in 2023. It would not be an overtaking by France, but it would come close, and be careful: there are two elements of political risk that must be included in this reasoning: one in favor of the overtaking hypothesis, one with a more uncertain interpretation.

The first is the one I have been drawing your attention to for twelve years now: France is (perpetually) at a crossroads that the shrewd IMF forecasters stubbornly refuse to take into consideration! Do you remember the exaltation of the domestic and 'ndernescional citizens for Hollande's victory? Here we made fun of it (in one of the essential posts of the blog ), the facts proved us right almost immediately. Hollande's popularity immediately plummeted, like, but much more so, that of all the presidents elected since the five-year mandate, that is, since 2000, that is, more or less since France has been in the euro, that is, since even a French President cannot do much more for the French than an Italian Prime Minister can do for the Italians:

( source : interesting to read their considerations on the "five-year effect" in light of what we know about the euro effect). We had talked about it here , among other things, regarding the consensus that Conte seemed to enjoy after the outbreak of the pandemic, and which was nothing more than a physiological effect of the electorate's search for reassurance, like that experienced by Hollande in the two Charlie Hebdo and Bataclan cases (visible in the graph).

With hindsight, however, we can also appreciate another nuance of this announced failure (announced only by us at the time, but announced nonetheless)! Forecasters, at the time, expected the new French government to restore public finances. To give you an idea, here we compare the IMF forecasts for autumn 2011 (before Hollande's election) with reality:

(in 2016 the public debt/GDP ratio was ten points higher than what the IMF expected in 2011), and here those of autumn 2012 (after Hollande's election):

(at the end of the five-year period, in 2017, they predicted almost twelve points of public debt/GDP ratio less than what Hollande then achieved, remaining well above the forecasts).

Now, before getting political, I'll make a technical point: an error of around 10% in a five-year macroeconomic forecast scenario could also be easily compatible with the uncertainty of the model. In fact, forecasts should always be formulated as intervals and accompanied by a probability value. Saying: "in 2017 the public debt/GDP ratio will be 86%" is not the same as saying "in 2017 the public debt/GDP ratio will be between 80% and 92% with a probability of 95%" (I put random numbers: for to put them right I should have the standard deviation of the forecasts of the IMF model, if it exists and if it is used in a neutral and transparent way, i.e. without "editorial" interventions, to make these forecasts). The fact is that interval forecasts are of no interest to anyone, politicians only understand punctual ones, and therefore forecasters provide punctual ones, thinking that politicians have short memories, and their nonsense will be forgotten.

And in fact everyone forgets them, except one: me.

This underlining serves to highlight that the order of magnitude of the error could also be excusable, but its systematic nature a little less! The IMF's attempt to fuel positive expectations on a "friendly" government (the antagonist being the anti-European Marine Le Pen) was evident, despite a simple political consideration: in order not to ignite the social powder keg of the banlieues , Hollande did not he had only one option, that of spending. Nothing but debt repayment! This was predictable, you can see the results, and the problems are still there, but amplified: there is more public debt, but there is also more foreign debt, but there is also less economic growth (because Germany does not bring down just us: it also drags down the French, considering that exports to Germany account for 12.7% of ours, but they also account for 11.7% of French ones!), but it is there, also and above all , much more sociopolitical tension, as evidenced by the result of the elections, by the difficulty of forming a Government, by the continuous, unfortunate news events.

I would add that the Italian experience has an important lesson for the French one. In fact, even France now has a debt/GDP ratio above 100%. This means that for France there is one thing worse than not being able to carry out austerity in order to avoid street riots, and that is being able to do it! In the first case, in fact, we would have a Hollande scenario, and therefore, to be clear, the five-year forecasts would have to be raised by at least a dozen points, but in the second case, if France ever actually decided to commit suicide following the ^TM Rules, the potential upside of the forecast is similar to what we had here with Monti, and do you know how much it was? This:

(almost 14 percentage points in five years, but with a much more rapid initial progression). If the problem is to "beat" the IMF forecast, let's say that we are in a win-win position: the competitor will do badly compared to the forecasts if he doesn't implement austerity, and worse if he does.

In this context, however, we must (and politically we can) only stand still, and send others crashing: just as the French forecasts are embellished by friends at the IMF, ours are uglier, but the facts are hard-headed.

The second element of uncertainty remains, the one which could work against us in the current conditions, and which in any case makes exercises like the one carried out in this post a little futile (although they serve to fix ideas). Sooner or later a financial crisis will come, I fear. I won't stop here and now to remember and analyze the indicators, I can't dedicate an entire day to it and half of it has already been lost, but I would be very, very, very surprised if a disaster like that of the 2001 or 2007. The conditions are there: a lot of liquidity injected into the market, and industrial policy directions supported by a bold (cit.) optimism of the will! Lu grìn could be the new dot-com , so to speak, but I'm not interested in going into the granularity of the causes here. As much as authoritative central bankers rinse their mouths with macroprudential policies , regulation , etc., the first and most characteristic sign of an idiot is to think that in 2024 he will be smarter than all those who preceded him over the long millennia elapsed since someone (Gurz, as you will remember) decided to buy something on credit! This book is a gigantic monument to human stupidity, a force that could fight for us as well as against us.

Various dilemmas arise here, all of which we do not explore.

Despite the fact that we are still the country in the worst situation with respect to the misleading indicator that the markets obsessively observe (public debt), the outbreak of a general mess (translation of global financial crisis ) today, with the country a net creditor towards foreign countries and in a balance of payments surplus, with an overall stable Government (apart from the well-known news events), it could hardly lead to an aggression like that of 2011, also because by attacking us it is clear today more than ever that they would risk being down too. Therefore we could move towards a general escape clause scenario (formal or informal), and in any case towards an accommodating attitude of the central banks. Scenarios that all in all favor us, as we have partly documented above. If this were not the case, everything would be blown up, but in the end are we sure that this scenario ( which we analyzed here ) is the worst of the possible scenarios? After living through the COVID recession, what we know about the redenomination recession seems largely bearable!

Fortunately, the decision is not up to us. The decision is up to others, and some have already clearly expressed themselves , reaching the right conclusion, even if along the wrong path!

So calm down!

Returning to the prediction from which we started: my "in my opinion" is admittedly a bit adventurous, but much less than right-thinking people might believe, and it is already a lot that today, unlike twelve years ago, certain things can be said on TV without eliciting derisive laughter: it is partly thanks to us, the authority we have been able to gain, and partly theirs, to the absurdity of the system they have built, the cracks of which are increasingly evident.

Au revoir!

(… summary: send the forecasters to hell, and help us keep the country on track. Only this can crumble our external adversaries and choke our internal enemies in their bile. The rest will follow …)