Covid: France´s Clocks Tick Differently

 

France's clocks tick differently. France, "that centre of resistance to the mechanisation and mechanisation of life", without which Europe would be[1] "poor and inwardly ripe for any colonisation".

For decades, France has boasted that its expensive public health system provides its 67 million inhabitants with the best possible care from birth to death. Louis Pasteur, who invented the world's first vaccine in the 1880s, is revered throughout the country. In the Corona Year 2020, however, the reputation of French health policy has been severely damaged; Chancellor Angela Merkel even warned of "French conditions" in view of the many triages, deaths and transfers of seriously ill patients to Germany. Despite high public spending, there is a lack of intensive care beds. The management of masks, tests, tracing and isolation is chaotic.

In the early days of 2021, France's inability to organise a credible COVID-19 vaccination programme has confirmed the deep flaws in both the health and political systems. These threaten to prolong the pandemic, cause thousands of unnecessary deaths and ruin the economy. Within the EU, the same handicaps apply - the slowness of the European Medicines Agency (EMA) and the EU's EU vaccine procurement delay in ordering the most advanced vaccines from BioNTech and Moderna[2]. But the table points to the stark differences: Germany may have stumbled; France is still hanging in there. Here, the binding bottleneck is not the lack of vaccines: Of the 560,000 doses received in France by the end of the year, only 2000 had been injected by 4 January. France's clocks tick differently.

 

Covid vaccinations in five major EU countries,

Ranking as of 4 January 2021

EU country	Vaccinations doses	%, population
Germany	265.986	0,32
Italy	128.880	0,21
Spain	82.834	0,18
Poland	50.391	0,13
France	2.000	0,00

Sources: Bloomberg; Covidtracker.fr

 

The French MIT economist Antoine Lévy, a true touche-à-tout (jack-of-all-trades)[3] , has named the essential facets of the failure of the French coronoa policy in a much-noted newspaper article in Le Figaro[4]. He identifies five major errors:

·       The misjudged primacy of logistics, according to Charles de Gaulle's motto "L'intendance suivra"[5] .

·       Failure to act for fear of prosecution, explained by the trauma of the French blood scandal. In the 1980s, HIV-contaminated blood products had been knowingly administered until public stockpiles were emptied.

·       State investments without cost-benefit analysis resulting in wrong priorities. Hundreds of billions of euros have been spent by the public sector since March 2020 - without earmarking enough money for logistical infrastructure necessary for herd immunisation.

·       State and administrative failure with wordy excuses, disinformation and war metaphors: first China was to blame, then Brussels, then capitalism - an omnipresent culture of excuses. But according to Lévy, the sluggish development of testing capacities, the mistrust in private laboratory facilities as well as underpaid and inadequate staff in France's public hospitals are the responsibility of French politics.

·       Loss of reality of a government infatuated with pedagogy and communication ("logorrhoea"), neglecting action in the face of a threatening crisis. "The morbid obsession with polite language, which must never displease, to the detriment of sober confrontation with the choice that reality imposes in all its difficulties" (my translation), this is where the author locates the greatest failure.

These complaints are not new as far as France is concerned. The slowness of political decision-making processes, the paralysing hierarchisation of an unequal society and the disdain for operational implementation have been described and analysed time and again. In addition to the book by the Basel historian Herbert Lüthy cited at the beginning, the historian Marc Bloch (L'Étrange Défaite)[6], who was tortured and murdered by the Nazis, and the French statesman Alain Peyrefitte (Le Mal Français) are witnesses. What can we learn from their works? This is what the second episode will be about.

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[1] Herbert Lüthy (1954), Frankreichs Uhren gehen anders, Zurich: Europa Verlag. The quotations ibid.

[2] The Economist (2021), Europe has fallen behind on covid-19 vaccination, 5^th January.

[3] Sofia Tong (2020), "Economist Antoine Levy is all over the map", MIT News, 21. August.

[4] Antoine Lévy (2021), "The slowness of French vaccination is a symptom of our downgrading", Le Figaro, 1. Januar.

[5] Loosely translated: The administration will follow.

[6] My thanks to Jean Pisani-Ferry for the hint.

Boom and Bust and Sovereign Ratings

France joined Austria in losing its top credit rating after government-bond markets closed last week, on Friday 13(!) January.The nations were cut one level to AA+ from AAA and face the risk of further reductions, according to Standard and Poor's, with Moody's and Fitch the world's leading rating agency. While Finland, the Netherlands and Luxembourg kept their AAA ratings, they were put on negative outlook. Spain and Italy were also among the nations downgraded and Portugal was cut two steps to BB. However, on Monday 16 January, French bonds advanced as borrowing costs fell at the nation’s first debt sale since Standard & Poor’s stripped it of its top credit rating and cut the grades of eight other euro-area countries. So what to expect for sovereign risk spreads of the downgraded Europeans against German sovereign risk, holding the euro region’s only stable AAA grade? Further widening, I am afraid.

For what it's worth, let's consult a paper that I wrote with Julia von Maltzan in 1999*, a rating event study exploring the market response for 30 trading days before and after rating announcements. The Figure shows the mean of relative yield spreads before and after 103 rating events. 

In general, the Figure conveys that a change in the risk assessment by the three leading rating agencies is preceded by a similar change in the market’s assessment of sovereign risk. The pattern is particularly clear when countries have been put on review for possible downgrade or upgrade. During the 29 days preceding a review for possible downgrade, relative spreads rise by about 12 percentage points.

For the Euro countries down graded before the weekend another of our result augurs badly, notwithstanding France's successful bond auction today:  Implemented negative rating changes seem to exert a sustained impact on bond yield spreads: the rating downgrade is largely unanticipated. After a country’s rating has been downgraded, the market appears to vindicate the agencies’ assessment over the next 30 trading days with an upward movement in relative yield spreads.

Implement downgrades of emerging-market bonds were shown in our study to produce a strongly significant market reaction: During 30 trading days, from ten days before the press release issued by the rating agency to 20 days thereafter, relative yield spreads widen significantly by an accumulated 12.7 percentage points.

* Helmut Reisen and Julia von Maltzan (1999), "Boom and Bust and Sovereign Ratings", International Finance, Vol.2:2, pp.273-293.