Feldstein on complaints of the French

I am not a great fan of Harvard economist Martin Feldstein, but enjoyed his recent holiday column. In it, Feldstein chastises the French for reacting to a possible credit rating downgrade by “lashing out at Britain”, a country which, unlike France, does not fear a rating downgrade.

French officials apparently don’t recognize the importance of the fact that Britain is outside the eurozone, and therefore has its own currency, which means that there is no risk that Britain will default on its debt. When interest and principal on British government debt come due, the British government can always create additional pounds to meet those obligations. By contrast, the French government and the French central bank cannot create euros.

If investors are unwilling to finance the French budget deficit – that is, if France cannot borrow to finance that deficit – France will be forced to default. That is why the market treats French bonds as riskier and demands a higher interest rate, even though France’s budget deficit is 5.8% of its GDP, whereas Britain’s budget deficit is 8.8% of GDP.

Martin Feldstein, “The French Don’t Get It“, Project Syndicate, 28 December 2011.

Feldstein goes on to explain that “stopping the eurozone financial crisis does not require political union or a commitment of German financial support”. Of course not. The financial crisis could end if only individual countries, such as Greece, Italy, Spain, Portugal and France, would follow the example of Ireland, Latvia or Estonia, and pursue policies of fiscal austerity.

Feldstein fails to mention, however, the pain and suffering that would accompany this fiscal austerity if there is no help from stronger economies or from the European Central Bank.

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