Imploding Welfare States: France Faces Downgrade After U.S. Cut

One by one the Bismarckian welfare states appear to be collapsing from their own weight.

From Bloomberg,

The decision by Standard & Poor’s to downgrade the U.S. credit rating leaves France as the AAA country most likely to lose its top grade, some investors and economists say.

France is more expensive to insure against default than lower-rated governments including Malaysia, Thailand, Japan, Mexico, Czech Republic, the state of Texas and the U.S.

“France is not, in my view, a AAA country,” said Paul Donovan, London-based deputy head of global economics at UBS AG. “France can’t print its own money, a critical distinction from the U.S. It is not treated as AAA by the markets.”

While all three major credit-rating companies have confirmed France’s top level in recent months, market measures indicate increasing investor skittishness over the country’s vulnerability to the European debt crisis. Euro-region central bank governors signalled after emergency talks yesterday that they would buy bonds from Spain and Italy to counter investor concerns and limit fallout from the U.S. cut…

While France’s debt of 84.7 percent of gross domestic product is less than Italy’s 120.3 percent, as a percentage of economic output it has risen twice as fast as Italy’s since 2007. French government debt totaled 1.59 trillion euros ($2.3 trillion) at the end of 2010, according to the European Union; Italy’s was about 1.8 trillion euros. France has had a larger budget deficit than Italy every year since 2006. S&P rates Italy A+, four levels below France.

Chart from the Economist

It has been turning out to be a great vindication and equally a monumental triumph for the Classical Liberals whom have warned all these years about the artificiality of this system.

As the great Ludwig von Mises once wrote,

An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.

This process of liquidating the Santa Claus principle has been happening as Risk Free are being exposed as Risk Loaded.

Although governments should be expected to keep up the struggle and resort to even more desperate measures in order to preserve this unsustainable system (via inflationism).

At the end of the day, economic reality will overwhelm them.