France on the Brink: Debt, Drama, and a Possible Sixth Republic

0:00Hi, I'm Nick, co-host of The Best One Yet. You optimize your workouts, your portfolios, and that rando startup idea that hit you in the middle of the shower. But if you're not hydrated, you're already playing catch-up. So we keep a stash of Liquid IV in our studio. One stick mixed into 16 ounces of water is clinically demonstrated to hydrate faster than water alone with three times the electrolytes of the leading sports drink, plus eight vitamins and nutrients. Whether you're traveling, exercising, or podcasting, the best business news ever, Liquid IV makes it easy to stay hydrated wherever life takes you.

0:28So shop now at liquidiv.com. Liquid IV Hydration, that goes wherever life takes you. To understand the economy, you have to understand human nature. This podcast is powered by Acast.

0:48David McWilliams: Bonjour tout le monde. We will talk exclusively about John Davis about the financial problems of the country which is called La Belle France. La Belle France. How are you, Mr. McWilliams? I am very, very good. I am very good. But I am in France, John. I am in the Ronan O 'Gara country. Ronan O 'Gara country, the Yldiray, the most beautiful, beautiful part of France. O 'Gara apparently lives just up the road. It is, you can only be described as the French Hamptons, you know? Yeah, yeah, yeah. It's like a French Martha's Vineyard. Quite shabby chic, but very, very, very, very sophisticated. And what a time to be in France, John.

1:35David McWilliams: Why? Because France is about to lose its government. And in great French fashion, there is a national strike on the 10th of September. Yeah. Everything closes down. And one of the most bizarre things about France, so... They love a strike and a march. They love a strike, they love a march. All that stuff, they really do. I mean, they really, really do. Listener, we're going to be talking about France today because the question on everybody's lips in the corridors of power in Brussels is whether or not France might be a large Greece in the heart of the European Union. And by that I mean a country that could increasingly go bust because the numbers are extraordinary.

2:20David McWilliams: The debt numbers, the fiscal numbers, the trajectory, but also, John, against the background of an increasingly ungovernable country. And I just want to make the point, I was cycling yesterday here, right? And I was looking around at this country, right? These little villages, they're so beautiful. I mean, it's as if the French people live in paradise, but they've convinced themselves they live in hell. How do you mean? It's a most beautifully sophisticated, high culture, high welfare, high income country. Yeah. Yet people here, they retire at about 50. They live till they're about 90. They're all these fit pensioners walking around the place, cycling around the place.

3:05Yeah.

3:05David McWilliams: Eating oysters and white wine and all sorts of things. they live in a paradise. They're doing something right. But they've managed to convince themselves that they live in some sort of, to use the American expression, the Trump expression, some sort of shithole country. So I don't know what going on strike and shouting and roaring and reducing the government to ineptitude is going to actually do for them. Because if you walk around here and you travel a little bit, you think, you know what? France must be, and it is, in the top 10 of countries to live in, in the top 10 countries to be born in, in the top 10 countries to get sick in, in the top 10 countries to be educated in.

3:47David McWilliams: All these things, they do amazingly well. And yet the people are so, and apologies to our French listeners, but there is something genuinely histrionic about these people. Dramatic, right? I am not a person who likes beaches, right? I'm a typical Irish bloke who lives beside the sea. So even though we're brought up beside the sea, the less of the sea I see, the better. But of course, these places are so beautiful. Yeah. There's a big, big beach here. And so I go down to the beach and there's about three or four of us. And the beach is not empty, not full, but it's fine. Yeah. We put our towels down around, I'd say, five yards from a geezer who was on his own.

4:28David McWilliams: He was in swimming, right? So we're miles away from him at this stage. He comes out of the sea, this fella. Owl fella. comes out of the sea, starts roaring at us. What? About how could you possibly do this? C 'est pas vrai. And he was, granted not, because he thought that we had put our towels too close to him. He was about five yards away and he was on his top. And I kind of thought to myself, the drama, the fucking drama, right? And then there were elderly people about another five yards on the other side and they started going, I mean, maybe it was just us. It was just mix on the beach that they don't like, you know?

5:04David McWilliams: Yeah, yeah. It was something to do, I'm sure, with your plastic bag of tinnies that you had. It was probably, yeah, it was the bag of cans, the super value bag of cans. Janneling our inner Matt Damon. But anyway. Yeah, but Mac, hang on a second though. Like you are in, as you said yourself, the Hamptons, the Ile d 'Reilly. So there's a particular type of French person there, I'm sure. You know, the part of France I go to is much poorer. Yeah, that's true. under pressure in terms of public services and transport even. So France is a very mixed country and there's a lot of in the same way as Spain is, there's a lot of empty France.

5:43Oh yeah, there is. Small villages kind of emptying out and derelict and all the rest.

5:49David McWilliams: Of course, Ilray is a bit smikier. I blame Ronan O 'Gara, obviously. I mean, maybe O 'Gara's reputation because they lost the other night as well. Oh, did they? La Rochelle. Yeah, yeah, yeah, yeah. So maybe after an invasion of paddies in monster jerseys as a result of O 'Gara, that the French have just got a bit pissed off. Yeah, no wonder your mom is going mad on the beach. Yeah, maybe, maybe. But in general, John, in general, what I'm saying is that the quality of life in this country is extremely high. Not only by European standards, but by international standards. And yet the sense of despair, dissolution, negativity, resignation is palpable.

6:31David McWilliams: And what I'm trying to understand is how you actually can square these two things. And what you're seeing right now is the government will fall today or tomorrow. There will be a general strike on Wednesday, the 10th of September. Mellon Schump, who's the leader of the far-left group in Parliament, has said that they will not allow any government reforms or changes or legislation to go through until Macron resigns. So he wants to try and use this opportunity to get Macron as president to step down. Macron himself is a lame duck president since he called the presidential parliamentary election last year.

7:18David McWilliams: He's still respected here a little bit on international affairs, but on domestic affairs, he's just laughed at. He's lost his power. So what you have is a sort of a crazy situation where Europe's second largest economy is in a total cul-de-sac. Because on the one hand, you have a huge amount of internal debts. We'll talk about that in a second. And on the other hand, you have a political class that seems intent on bringing down the state, trying to foster another election. And of course, the polls are saying that Marine Le Pen, after her third time trying to be president, will win this time around.

7:59Well, she's getting closer each time, isn't she?

8:02David McWilliams: She's getting closer and closer and closer each time. So what you have, John, is at the heart of the European Union, there has always been France. France is Europe. France and Germany's alliance is what makes the European Union tick. France is the big country. It's always regarded itself as the leader in Europe. And what we're looking at now is the interest rates that the French government has to pay on its debt is now higher than the interest rate that the Greek government has to pay on its debt. So the financial markets are looking at France as a worse bet than Greece. Now think about Greece defaulted.

8:41David McWilliams: It's the first time ever, is it? It's the first time ever. So Greece defaulted on everything about 10 years ago. So it just shows you how badly the French economy and financial and fiscal establishment has managed itself over the last 10 years. So that is, for France, a big dilemma. I have just one caveat, John, is that a lot of the financial markets, bond markets, commentary is in English, number one, and it's written by English people, number two. Now, the reason this is important by Anglo-Saxons is that when I worked, I worked for a French bank years ago, BNP Paribas, and I worked for a Swiss bank.

9:19David McWilliams: What I was always amazed by in London was the talk about France was always so negative on the part of English economists and British-based economists, right? Right. What do you mean? Like, why? Well, I remember even in the 90s, many times the central case was that France would unravel, European Union would unravel and it was only a matter of time before the euro unraveled, broke apart there would be debt crises, etc. So the default position on the part of Anglo-Saxons has always been that France is one bad decision away from a default. I never ever thought that and I remember being the French economist in UBS and I always said, look hold on a second they've got a very high savings ratio they've got very, very good companies all that sort of stuff, right?

10:08Yeah, but that's just the English view, which they, based in history, you know.

10:12David McWilliams: It's based on Agincourt and all that sort of stuff, you know, and the Hundred Years' War, and we used to own Calais and all that sort of malarkey, right? Yeah, yeah. So what I would say, dear listener, because this is an Irish podcast, discount a little bit the obsession on the part of the British financial community suggesting that France is always and ever one notch away from default. However, looking at the figures now, John, and looking at the inability of France to govern itself and looking at the paralysis and looking at the fact that they've got a lame duck president and looking at the fact that financial markets are now saying, hold on a second, there is something seriously wrong here.

10:51David McWilliams: Not only seriously wrong, but the prospect of the new government, of a Le Pen government, is a totally different kettle of fish than anything we've ever experienced. Because why? Because literally since de Gaulle declared the Fifth Republic, there has been a sense of stability in France, and that begins to unravel. So the podcast is about two things, John. One, might the French default, number one? Number two, and probably the more provocative discussion will be, are we on the cusp of a sixth republic in France? because remember that de Gaulle created the Fifth Republic in response to an inability of the parliamentary system to govern itself properly in the 1950s against the background of the Algerian War.

11:42David McWilliams: Because the socialists, they were always constantly arguing, and de Gaulle said, hold on a second, guys. We've got to fix this because the country's ungovernable. And he declared the Fifth Republic, and he himself wrote the constitution of the Fifth Republic, and he elevated the president to be almost, have superhuman powers, right? One man. And this is in contrast to our presidential election where we have a presidential election about a sort of a symbolic position where the French president is a real position. Why did he do that? He did that because he thought, hold on a second, I'm the big man.

12:13David McWilliams: I'm the hero of the Second World War. I'm the leader of France and only I can sort this thing out. So I'm just thinking, might we get a six-year-old? Very Trump-like, isn't he? He was very, very, yeah. Unlike Trump, he wasn't a draft dodger. He was a real thing. He was a real soldier to go. Although they did scarper very quickly, but maybe we won't talk about that. So what I'm saying is, is France ungovernable now? If it is ungovernable, will you get a Le Pen presidency? And will a Le Pen presidency change the nature of the presidency and declare a sixth republic, which could completely and utterly upend the entire system?

12:51David McWilliams: and with it, the important thing for non-French people listening to this is the entire infrastructure edifice around which the European Union is built. Not just the euro, but all the institutions, all that sort of stuff. So big stuff, John, this week in France. Okay, and I have a load of questions about this, not least kind of how did we get to this point in all this. Can I just stick with the possibility of declaring a sixth republic? What does that actually mean and what does it entail? Is that like just rewriting a constitution? And surely that's a democratic process as well. So France has had, as we said, has had five republics since the French Revolution.

13:32David McWilliams: And at every stage when there's a massive crisis, the French are, and I think it's important, and they are big enough to change their constitution. This is not working. I happen to think that Ireland should declare a second republic, by the way, because I think there's lots of things that don't work in Ireland at the moment and the way in which legislation works and property and la la la. But anyway, that's a different question. So what it would mean would be the new president, in this case maybe Le Pen, would declare the Fifth Republic dead and would begin the process of rewriting the Constitution.

14:07David McWilliams: Now what de Gaulle did back about 30 or 40 years ago at the beginning of the Fifth Republic was he centralized enormous amounts of power in the hands of the president, which is why when Macron started, he was being referred to as the Jupiterian president. Yes, yes, I remember that. Yes, he saw himself as Jupiter, like this all-powerful sort of almost godlike creature. Little Jupiter, a mini Jupiter, exactly. But nonetheless, Jupiter nonetheless. So the question is, would Le Pen do something like that? Or not even Le Pen, whoever comes in, right? And I think you cannot be ruled out. And that, of course, would change the nature of France completely.

14:46What's the process in that? Is he just declare it and you force it through?

14:52David McWilliams: No, there'll be a referendum. There'll be a referendum. And of course, you know from the referendums on, for example, Brexit, how weird referendums can go. Yeah. So up the sleeve of the French president is the right to declare a referenda on the Constitution. And this could well be something that Le Pen, if she wins, and if there is a fair wind behind her, and if there's a sort of a confidence on the right wing, that they could declare a Sixth Republic, which might have massive implications for human rights, for all those sort of things, for the constitutional nature of France. Yeah, and for Europe, ultimately.

15:30David McWilliams: And for Europe as well. So that's at play here. So I think that the reason the financial markets are now becoming much more nervous about France isn't just because France has got a huge amount of debt. It's because the process that could be triggered by this latest round of political upheavals and instabilities could lead to something really monumental. And against that background, people are rightly thinking, hold on a second, how does this country get out of this mess? Yeah, yeah. So at the moment, there's a very sort of bedraggled fellow, John, called Beirut, and he's the present prime minister.

16:04David McWilliams: And he is going on TV all the time, trying to convince the French that they've got a crisis, and nobody wants to listen to him. So on the one hand, they think living in France is awful, But on the other hand, nobody wants to do anything about it. Yeah, because they're at lunch. Exactly, because they're at lunch. Exactly. Because they're eating moules frites and a glass of Sancerre. So what you have, right, is this poor bedraggled fella with a coalition that doesn't work. Coalition has now broken apart. The left wing are going to, they're basically going to say, we're going to torch everything, right?

16:37David McWilliams: The right wing are sitting in the wings, just waiting for the whole thing to pan out. all the while Le Pen's position in the polls rises, rises, rises. So this is great for the extremes on the left and the right. The center is being hollowed out. And again, one of the reasons is because Macron, when he declared his snap election last year, lost. He thought he'd win, he lost. And the extremes on either side are setting the pace of the discussion. And they are setting the terms of engagement of the political class. And the most obvious example of that is the national strike on the 10th of September.

17:17David McWilliams: Because what they want to do is they want to bring down the president. It's not just that they want to change the system. They want to bring down the president. And that was Mellon Shump, the extreme left leader, has said that basically they will do nothing until Macron resigns. So we're in this total bind. Yeah. So what I'm saying is this is kind of the end game for Macron. and what people are concerned about is, is it the end game for the Fifth Republic? And if it is, what does the Sixth Republic look like? And who's going to be the leader? These are huge imponderables. All the time, the financial markets are getting increasingly worried about the sustainability of French debt.

17:59David McWilliams: And I'll just give you some figures, right? So what I've done is I've looked at what they call the consolidated balance sheet of the French system. So typically what happens is people just look at the debt-GDP ratio, the government central deficit, right? But because in the French case, there has never really been any privatization of national utilities or any material privatization, what you have is a huge amount of sort of semi-state bodies. The biggest one people will know is the SNCF, which is the train system with the TGVs and the metros and all those sort of things, right? But in parallel with central government, there is this huge, what we would call in Ireland, semi-state debt as well.

18:38And is this part of the problem that, you know, obviously semi-states, as we know here, are notoriously inefficient?

18:47David McWilliams: They're inefficient, but for the death system, I think the interesting thing is that the French transport system is good, is really, really good. One of the reasons a lot of the French infrastructure is superior to everybody else is because it is nationalized and they have had lots of investment. Because what happens when you privatize a utility, as you see in the United Kingdom, And usually what happens is shareholders just come and actually hollow out the utility and take all the profits. So, I mean, part of the French success is the very success of their big national champions. And they're very proud of that too.

19:21David McWilliams: Exactly. But from a death perspective, you've got to add all this stuff together to get the picture. And the reason is the following. It says Hemingway was set, right? How did you go bust Mr. Hemingway? Ernest Hemingway was probably the most successful novelist of his generation. and reporters couldn't understand how he went bust, right? And they asked him and he replied, how did I go bust? He said, at first quite slowly and then very, very quickly. And that is how countries go bust. That's how people go bust. And why is it? It's because the beginning of the process, all the creditors are individually hoping that they'll get paid, right?

19:56David McWilliams: And the debtor is kind of moving money from A to B, trying to plug holes in the balance sheet. And this can go on for a while. It's kind of excruciating this process of gradually going bust. But then what happens is the debtors, the creditors, begin to talk to each other. And they realize that they're all on the hook. And then they come after the debtor all at the same time. And of course, the debtor can't actually move money around. And when they come after the debtor all at the same time, what you find is that's the default process. That's the very quick part, as Hemingway said. You know, the slow part is excruciating, and then it happens quickly.

20:28David McWilliams: The same thing happens for countries. There's a run on the currency, there's a run on the bond market, and it happens very, very quickly. The reason it's called a run, not a walk or an amble, is it happens quickly. Yeah, a sachet. A sachet, exactly, exactly. A debt sachet. Yeah, a sachet on the currency. So if you look at, and the currency is an important part as well here, so the total external debt, taking everything together of France, is about 248 % of its GDP, its external debt. Its total debt is about 319 % of GDP, right? because it owes a lot to itself, right? Wow. French investors, right?

21:07David McWilliams: That is the second highest in the world after Japan. Now, the problem with Japan is that... Well, hang on a second. How come Japan can survive or has ceased to be surviving better than France with a level of debt that high? Very good question. Two reasons. First is the Japanese finance themselves. So Japanese savers buy Japanese government bonds. and it's a form of transferring money from the state to the savers. So if the rate of interest goes up, it's Japanese savers that actually see their income going up. So in a way, the Japanese system is internal. That's the first thing. The second and more crucial aspect is Japan prints its own currency.

21:49David McWilliams: So it prints the yen, right? So the Japanese government can actually create inflation to reduce their long-term liabilities if they want to. The French government can't because the French government used the euro. The euro isn't France's currency. France doesn't print the euro, right? The ECB prints the euro. It was France's idea though, wasn't it? It was absolutely France's idea. And it was France's idea to have the euro to try and bring the Germans into the French zone of interest. What has happened is the good thing about the euro is in good times, interest rates are low, so companies can get finance, people can borrow.

22:27David McWilliams: But in bad times, you cannot print money to get out of your debt situation. That, of course, is the essential difference between Japan and France, which is why Japan can actually go along, amble along, no problem at all for many, many decades. France can't because it can't print the money. So the French government can't basically lean on the French central bank to print the money to get them out. So that's the problem. This is where France is in this sort of debt cul-de-sac at the moment. And it's a fundamental flaw of the euro. It is. It's a fundamental flaw of the euro. It's also a fundamental flaw of the design of the euro because the euro is a monetary union without a fiscal union.

23:14David McWilliams: So it's a monetary union without a budgetary union. And if you don't have a budgetary union, what you will have is various different fiscal policies deep within the system. And because the system is slightly deflationary, in the sense that the objective of the central bank is to keep inflation at 2%. It's very, very difficult if you get into a debt spiral to get out of the debt spiral. And that is, of course, what people are looking at now within the euro. So if you look, for example, of the two main countries in the euro, France and Germany, they started in the euro, let's say, in 2000 with broadly the same amount of debt.

23:52Today, if you do the consolidated balance sheet of Germany, its total debt to GDP ratio is about 200%.

23:59David McWilliams: France is about 319%, right? So it's really disimproved over the last 20 years. It costs Germany about 12 % of its GDP to service this debt. It costs the French about 20 % of GDP to service this debt every single year. Now, up to now, foreigners have been happy to buy French debt because the assumption was the European Central Bank would do what they did in the case of Ireland and ultimately in the case of Greece, which is they bought the debt of defaulting countries, right? So the assumption is that the European Central Bank will come in and bail out France. That was up until the last couple of weeks, right?

24:44That's kind of a crazy idea, though, isn't it? kind of banking on the fact that somebody else is going to bail me out. It's like not taking responsibility for yourself. If your kids did that, you know, don't worry, Dad will bail me out.

24:58David McWilliams: Come on, man. Well, I'll tell you what, right? So basically what you have is a situation where when the ECB was set up in the 1990s under the guidelines of the Maastricht Treaty, there were an enormous amount of locks and checks and balances which said the European Central Bank will never, ever, ever buy the debt of defaulting countries, right? Now, that was the case up until 2012 when there was a European debt crisis. The European debt crisis led to a euro crisis because people said, well, hold on a second. If this central bank does not act as the buyer of last resort of the bonds of a country that's in trouble, the only way out for that country is to leave the euro.

25:47David McWilliams: And Mario Draghi came in and looked the markets in the eyes and said, I will do whatever it takes to save the euro. In order to do that, he had to change all his own regulations about what the central bank could and could not do. Now, the fascinating thing about central bankers, and I've always said this, is central bankers actually don't care about money. And by that, I mean, something they don't care about money, money is not an object for them because the central bank prints the currency and as a result of that it can just print the currency buy the bonds put the bonds into a big skip and not worry about them for another generation right this is what again is the magic of central banking that central banking can actually magic up money out of nowhere yeah up until now there has been and this is the critical critical part of the story here has been an assumption that the european central bank will bail out France, even though it's really, really big.

26:45David McWilliams: It'll be the buyer of last resort. It will send a sign to investors, look, don't worry about this. We have this. We've got this, right? But the assumption was that the government that was in place in Paris at a time when the debt crisis was unfolding would be a government that was broadly in line with the European Union, which has always been the case since the Treaty of Rome in 1957, John, which is the start of the European Union. But the government in Paris would be central to and would be aligned with the European Union. What happens if Miss Le Pen gets into power? Mr. Le Pen and the far left are sovereignist, devolutionist governments.

27:37David McWilliams: They want more independence, less Europe, more sovereignty. So the assumption that the Bank of Europe will bail out a government that is explicitly anti-European begins to unravel. Because the assumption was always that they'd bail out the French or the Irish or the Spaniards because it was all parts of the long process of European integration. We're all going to become single market, more integrated, et cetera. And this, I suppose, is what's really spooking people, is that what happens if the ECB decides, well, you know what? Marine Le Pen's policies are not aligned with us. She is explicitly anti-European and I'm not sure we will bail her out.

28:27David McWilliams: So that is the key difference, John. And that's what people are looking at. Okay, let's explore that a little bit more and the possibility of a wider crisis in Europe after a bit of this.

28:48Hi, I'm Jack Cravici, Kramer, host of The Best One Yet. At T-Boy, we're always talking about small decisions that can have an outsized impact. One of the simplest is staying hydrated. Whether I'm traveling, getting a workout in, or heading into a busy day, I keep Liquid IV on hand. It's clinically demonstrated to hydrate faster than water alone and contains three times the electrolytes of the leading sports drink, plus eight vitamins and nutrients. It's an easy addition to your daily routine and helps support hydration when you need it most. Shop now at liquidiv.com. Liquid IV hydration that goes wherever life takes you.

29:23Max, so we're talking about the unraveling of France and the big French crisis and what that might do to number one, the Euro, and number two, the EU in general, and are the cracks beginning to appear in that. But before we ask that, I just want to ask you, like in all the podcasts we've done, we've been talking about debt crisis in America, in France, in the UK, in Ireland, in Japan, here, there and everywhere. So this kind of system, this economic and financial system that we all live under, if at the end of the day, we all just end up with increasing debt burden, You know, does it mean that this system just doesn't really work?

30:11It's not fit for purpose. And do we need not just a new French Republic, but a new tear down the whole system and start it all again?

30:21David McWilliams: Well, that's not a small question, Johnny Boy. That's not a small question. You have 10 seconds to answer that. Okay, so this is very fundamental. So what most people don't see is that they look at debt, but every single debt has got a corresponding asset. Yeah. So what are the assets that have been built up? So yes, the world, particularly the Western democracies, seems to have an exploding debt figure, okay? That's where we use the debt-to-GDP ratio. But what we never look at is what are the assets that we have built up? Think about all the assets in the French state. Think about all the human capital.

31:00David McWilliams: Think about all the universities. Think about all the factories. Think about all the railway infrastructure. Think about all the buildings, right? So what we forget is that every debt has a corresponding asset. It's only when the quality of those assets begins to deteriorate that we should worry. See, at the moment now, what we are looking at, the debt-GDP ratio, if you really think of it, if you really intellectualize about it, is quite a fallacious number because it's looking at debt, which is a stock, against income, which is a flow in economics, right? This is deep macroeconomics, John. Yeah, yeah, yeah, good stuff.

31:37David McWilliams: I didn't think we'd get there on a Sunday, but anyway, here we go, right? So what you've got to look at is the debt to asset ratio. But your point is very, very valid. Why is there this enormous, or seems to be this extraordinary explosion of government debt in particular? And the reason there's an explosion of government debt in particular is because government debt is the collateral that central banks require in order to lend money. So this is the core of the fiat system, which is what a lot of our crypto boys don't understand, right? They only look at one side of the balance sheet. So for example, if the Irish state wants to build a road, it gives a government bond to the central bank, the ECB, and in return, the ECB give it money.

32:27David McWilliams: So what you have is as the debt burden seems to increase, what you're also seeing is a very dramatic increase in the money supply. And the money supply is used to buy stuff. Yeah. So at the core, the reason government debts are so big is because they are the collateral against which the entire monetary system is built. And if you assume that all that money is being pissed away, and there are no assets on the other side of the balance sheet, then you can say, well, hold on a second, we've got a problem. But if you look at what is actually on the other side of the balance sheet, there tends to be assets.

33:06David McWilliams: Now, at certain stages, there has to be a reset, and you're absolutely right. And that's what the rate of interest is telling us. Because the rate of interest begins to rise because the rate of interest is a reflection of the perception of sustainability. So there may well be a reset, and that reset is called a reset, it's called a default, it's called a renegotiation. Whatever it happens to be, it's a reframing of the original contract between debtors and lenders. Now, that may well happen. But what we're looking at in the case of France is something that technically I've just described what goes on, but politically we're looking at something different.

33:45David McWilliams: And the reason is because defaults are contagious. Why are they contagious? Because financial markets behave like herds. So on the way up, they're driven by FOMO, a fear of missing out. So they want to acquire the asset that everybody else has. But on the way down in a crisis, there's the opposite of FOMO. Everybody wants to sell everything at the same time. And the problem with that is that if you, for example, John, are in debt, right? and the banks say, well, listen, John, you know what? You're in debt. What you should do now is sell your flat or your house that you live in to pay your debts.

34:21David McWilliams: Yeah. That's fine as long as you're the only one selling. So you will find a buyer. But what happened if all the banks tell all the debtors to sell at the same time? The only thing that will happen then is prices will fall because there are too many sellers and no buyers. And the buyers, of course, will wait on the sideline. Why? Because they'll say, well, look, if the house price goes down by 20 % today, it might go down by another 20 % tomorrow. So we'd be foolish to buy today, so we wait, right? So the very act of falling prices can actually militate against buying things. Now, this is why you get that crisis, right?

34:58David McWilliams: So there's a contagion. If something happens in France, then someone will say, well, what about Italy? Italy's metrics are as bad as France. They start to sell Italy. Then they say, well, what about Spain? They start to sell Spain. So the reason within the euro there is this fear of debt crises is because of the fact that you have monetary policy, but many different fiscal policies. So you have, in effect, a one-size-fits-all. The only way that can actually make sense is if the central bank does what Mario Draghi did in 2013, and they go in and buy the stuff, right, as the lender of last resort.

35:38David McWilliams: But they only buy the stuff if they are aligned politically with the debtor. Yeah, yeah. So in a way, they give their mate a helping hand. But what happens if the debtor, in this case, France, is being run by somebody who is explicitly anti-EU and has come in on a platform of less Europe, more France, of France first? She spoke years ago about going back to the French, France, she's dropped that. But this idea that the European Union will always and everywhere indulge people does not necessarily make complete sense if Le Pen is... And the good example is Orbán, you know? Yeah. I mean, the European Union is very against Orbán.

36:22David McWilliams: They're not supporting Hungary in any shape or form. Yeah. And the big fear... There's a big protest here last night with the Ireland-Hungary match. Was there? Yeah, because Orbán was here. Oh, was he? Did you go? Did you throw bricks, Joe? No, not this time, no. So if we come back to this idea, right? The fear now is not that France wakes up and says, oh my God, we have a huge debt burden. The fear is that France wakes up this week and realize the country is ungovernable. The system isn't working. The center cannot hold. Macron is a lame duck. Then people say, okay, well, what's coming after Macron?

37:08David McWilliams: It looks like Le Pen is coming after Macron. And then what does Le Pen do? And what do financial markets do if Le Pen gets in? And what does the European Central Bank do if Le Pen gets in? Now, that is the real imponderable. And if there were a crisis in France, it's highly unlikely that the European Union could ring France alone. Yeah, so it would be contagious all across Europe. And then what? I mean, could this be the end of Europe and or the euro? Well, I think that let's not get too Brexity. There'll be lots of in the Farage Reform Party in London. The Daily Telegraph will be loving this carry on, right?

37:52David McWilliams: By the way, I happen to think that Britain will default before France, but that's a different podcast. We did that podcast before. Oh, yeah, we'll come back to that one. We'll come back to that one. But what I do think is that the risk that that eventuality becomes a reality is increasing by the day. And ironically, the very country that used to be the most stable, dependable European country, France committed to the project, could well be the weakest link in the chain. And that is something that happened once. John, I'll give you a little bit of history. In 1980, there was a policy called the Francfort, which was Mitterrand did a massive U-turn.

38:39David McWilliams: Mitterrand comes in as a socialist president in France, bulldozes through all these social reforms, which is now why the French retire at 52, right? That was all Mitterrand's fault. The financial market said, we don't agree with you. Money left France. There was massive capital fright out of France. And Mitterrand did a U-turn. in 1980. And since 1980, France has been subservient to Germany in economic policy. If this changes, what we're talking about is, in effect, 50 years of European history unraveling in 50 days. And that is the key risk. And that's why France this week is the center of the financial world, which is why we're doing a podcast on it, John.

39:28Yeah. I have another theory, by the way. What's your theory? Go for it. The theory is that France started going downhill when they stopped drinking wine in the quantities that they used to. Good job we're here then. Just pushing it back up. Yeah, but seriously, red wine consumption in France is down about 90 % since the 1970s. Did you know that?

39:50David McWilliams: Well, let us come back. In fact, John, you know what we might do? We might come back to France on Thursday from a different angle, but we might come back to France because this is a crucially important story and it happens once in a generation and it's happening right now.

40:20Hi, I'm Nick, co-host of The Best One Yet. You optimize your workouts, your portfolios, and that rando startup idea that hit you in the middle of the shower. But if you're not hydrated, you're already playing catch-up. So we keep a stash of liquid IV in our studio. One stick mixed into 16 ounces of water is clinically demonstrated to hydrate faster than water alone with three times the electrolytes of the leading sports drink, plus eight vitamins and nutrients. Whether you're traveling, exercising, or podcasting, the best business news ever, liquid IV makes it easy to stay hydrated wherever life takes you.

40:49So shop now at liquidiv.com. Liquid IV hydration that goes wherever life takes you.