Hard Lessons
Research for Online Investors

6/6/12

Francois Hollande has fulfilled one of his campaign promises.  Yesterday the French Cabinet lowered the retirement age for some workers from 62 to 60 years of age.  The change affects approximately 110,000 workers.  To qualify they must have contributed to the retirement system for 41 years, so they would have had to start work at 19 years old.

According to the Wall Street Journal, maternity leave and other unemployment periods will not be counted towards the 41 years of contributions.  The lower requirements to retire are estimated to cost $1.4 billion dollars next year and increase at 30% annually over the next three years.

Costs will be borne by employees and employers in increased pension contributions.  Hollande campaigned on rolling back the increased retirement ages implemented by past president Sarkozy.  He also promised to create 60,000 new civil servant jobs in education (out of 150,000 new state jobs), increase taxes on the “rich” and reduce the deficit to 3.0% of GDP in 2013 then balance the budget by 2017.

France has parliamentary elections scheduled for the next two weekends.  The French Senate is already controlled by the left, now Hollande needs control of the lower house by his Socialist party or at least a coalition of Greens and Communists.

The two round elections finish on the same day Greece votes in the second parliamentary election in as many months.  Greek voters are deciding who to back.  If they vote for SYRIZA, the party has promised to throw out the austerity measures required by the eurozone to continue receiving bailout funds.

The dichotomy between France and Greece couldn’t be greater.  France is embracing socialist policies and wants more money “for growth” from the eurozone.  Greece is trying to pull back from all their socialist policies and is pleading for more money from the eurozone just to pay their bills.  They are raising retirement ages and laying off government workers.

French voters remind us of “Whistling Past the Graveyard.”  They evidently believe they are immune to the laws of economics.  They have bought in on the lie of socialism.  The Soviet Union wasn’t enough, Greece wasn’t enough, they will have to learn on their own.

More hard lessons are going to be taught.  France seems determined to spend until they run out of money...and credit, thus ignoring Margaret Thatcher's famous observation.

S&P cut France’s sovereign credit rating in January.  One of the most important reforms forced on Greece by the eurozone to receive a bailout was raising the retirement age.  Can you imagine the coming confrontation when France needs consideration from Germany?

While the French government wants to increase taxes on the wealthy, the country’s unions are predicting layoffs from many large corporations.  The country ran a record $85 billion dollar trade deficit last year.  Unemployment is at a 13-year high at almost 10%.  GDP is expected to grow at a tepid 0.6% this year.

The International Business Times reports that Sarkozy asked companies not to announce layoffs before the presidential elections.  Hollande is playing the class warfare card, and since he is in office now, businesses have no political reason to hold back on cutting costs.

The market is rallying today on hope.  Hope the European Central Bank (ECB) will extend some help to Spain tomorrow when they try to sell bonds.  Hope that Ben Bernanke will comment favorably about another round of quantitative easing tomorrow when he testifies before congress.  Hope that Greece will elect the New Democracy conservative party in a week and a half.  Hope that the Federal Open Market Committee (FOMC) will keep the party going.  Hope the U.S. will get involved in the eurozone credit crisis.

We think that is a lot of hope.

Quote:
Hope is not a trading strategy.---John Dalt

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