french flag, french economy, euro, france, economic crisis, debt crisisBy Alex Salomon

AFTER GREXIT & SPAIN COMES THE “FRANCESTEIN” FRENCH MONSTER

Those who follow me on Twitter @Alex__Salomon know that I have been brewing an article on #Francestein for a few weeks, and, while I procrastinated, The Economist beat me to it, and made their [controversial] cover of this week’s edition on France, the Time Bomb at the Heart of Europe.

I am left with my pride to offer an alternative look at the reasons why France is the next European shoe to drop, why it must drop, and maybe when it will drop.

If you are pressed for time, here is my conclusion: France must fall, must clash, and must almost collapse because it knows no other ways to reform. The tension is unavoidable, because it is the only way it will change. In a way, think of it as the US “Fiscal Cliff.” We need it to offer long-term US solutions. And because of this, we’ll likely avert a severe escalation of tensions. But in France, the underlying tension needs to be taken to another level so that reforms are enacted. It cannot be averted. Far from clichés of all sorts, this is the greatest difference between Latin societies and the USA: we reform based on fear of danger; they reform based on consequences of danger.

If you are not pressed for time, I would like to offer an unconventional look deep under the French hood. But, I must warn you that if you believe all the worn out clichés and French jokes, stop reading now and stick to Fox News and CNBC’s comical portrayal of foreign policy and supposed French traits. Truth is, French people work hard, have excellent productivity and top skills. They lead hard in diplomatic advances and they fight hard at wars. They have been out on all major fronts and the Foreign Legion would give any unit a run for their money. The issues plaguing France are much deeper and farther from a perceived issue of laziness and workmanship.

It all starts very much like in Spain and Italy: Latin countries can seemingly only reform through rebellion against what I call the “Father complex.” It can only be a violent, spurting form of reform, a societal reflection of a mental scheme, where one can only advance by fighting against the father figure: “L’Etat”, the State.

Here are some of the least covered sociological realities of the French (and Latin, at large) societies:

1)   They are historically driven by a strong father education, father power and pyramidal families, where the first-born is groomed to inherit and protect the wealth accumulated through generations. This mental model has shaped the societies for centuries. In France, the only way out is to become a physician, an engineer or an attorney. Of course, you can add veterinarian, pharmacist, architect or notary, but you get the picture: the way out has not included becoming an entrepreneur.

2)   Over the years, these ways out have evolved to being groomed for the best school, the National Administration School (“ENA”) or Polytechnic (the French equivalent to the USA’s M.I.T.). But again, going down this path ensures a certain future and working for the best companies; but doesn’t include entrepreneurship.

3)   Consequently, in an overwhelming fashion, French government and Congress are made of attorneys, doctors, engineers, teachers and professors, not entrepreneurs. Therefore, most of the legal framework is not inspired by business owners, but by categories telling businesses how to be run from outsiders. In 2009, the French Congress was made up of approximately 20% of current or previous business owners and/or senior management vs. 40% of civil servants and/or teachers, 10% attorneys, 15% medical professions, followed by farmers, civilians and other professions.

4)   The current Executive government of President Hollande’s 30 Ministers does not include a single former private sector employee. Not one. 0.

5)   The French (and very much Spanish) elitism runs deep in that pyramidal society and helps explain why minorities (in spite of size and integration) have not found their way into the Congress and only recently into the Executive government.

6)   I cannot express strongly enough how these factors deeply affect the relationships between the haves and the have-nots, driving a rift between capital and labor. In a Marxist vacuum, France is a fantastic lab study for deeply rooted, antagonistic desires from those who have and those who do not. The entire society has been resting on 1200 years of protecting estates & wealth through families’ first-borns (the haves) and leaving crumbs to the rest. Coupled to fear of free-enterprise and actual, real lack of credit and resources to launch enterprise, the tension, sometimes hatred of capital vs. labor is palpable in France.

7)   Citizens are therefore “sold” liberty and equality as propaganda to ignore the truth: capital is all but equal, but the State will make it right.

8)   Lastly, there is deep, drawn out fascination with messianic father figures in France, from the days of omnipotent Kings to Napoleon to De Gaulle. This fascination leads to a constant mental relationship and entrancement with “The State” and how it actually exists in daily lives. The State educates, protects, serves, and heals. It takes away and gives back. It restores the balance between haves and have-nots (individuals cannot do this, for the State must do it!). In most French minds, for practical reasons, the State “lives.” And The State makes all citizens equals. The State is Francestein!

Now let’s look at some less covered socio-economic realities of the French society.

1)   In order to select fast and early the “survivors” (engineers, physicians, state servants or attorneys), most French people have to decide by the age of 18 what they will do for the rest of their lives. Once you pick a career, the lateral moves are almost impossible. It is a statistical blunder for a nurse to start medical school at 40, for an engineer to go to law school, for an attorney to start a business. Once you pick and begin any career, all hopes and dreams of becoming something else are gone. Forever. You mostly choose your life by age 18. If you fail to do so, being 20 and vocation-less is the surest way to unemployment.

2)   The only real labor flexibility is a vertical one in State structures or private companies. You can rise up the ranks, but you can almost never change your life. It becomes yours, forever. The 25-year old kindergarten teacher almost certainly becomes a 60-year-old kindergarten teacher.

3)   Once you understand the 18-year old fate and karma, the will and desire and fight to retire at 60 (or earlier) makes a lot more sense. Just imagine being stuck in the same job, without the real possibility to go back to grad school, to learn, to move on. While knowing that upon reaching 55, 60, 62, you will be paid your salary in full forever: from the beginning, the end becomes the goal.

4)   Add to the mix the State influence on how to retire and the need to make all equals; add in the absence of private retirement options, the fear of capital, and the lack of entrepreneurial initiatives, and you have another recipe for failed economics 101. People expect a full salary for 25-30 years after their retirement… for almost as long as they contributed and worked. At some point, the math no longer adds up!

In 1936, the French retirement system was brilliant and revolutionary. It was based on a shorter life expectancy and 3 or 4 workers per retiree. In 2012, the system rests on 1 worker paying for 1 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, 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 the unemployment by the end of 2013. How will they do it? The same way they always did: creating state jobs and civil-service jobs. With what money? Debt. More debt. More deficit.

So, after Grexit and $pain, 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 teenagerial 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… 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. And 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.

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