The Winner of France's Election Will Be Handed Fiscal Dynamite

Markets are rumbling at the idea far right candidate Marine Le Pen and far left candidate Jean-Luc Mélenchon might squeak through the first round of French voting.

Both candidates are advocates against many (or all) European Union policies and either one winning the presidency would rock Europe’s foundations. But no matter which candidate is victorious after the second round, the new president will be handed a fiscal situation as explosive as dynamite.

Dan Mitchell writes that France has promised pensions far beyond the ability of private sector tax revenues to deliver.

We’ll start with this measure of implicit pension debt (IPD) in various European nations. France, not surprisingly, has made commitments to spend money that greatly exceed the private sector’s capacity to generate tax revenue.

By the way, the accompany article notes that the numbers for France are even worse than suggested by the chart.

Most tax and accounting codes require companies to report such implicit debts on the liability side of the ledger as obligations. Not so with governments, whose accounting practices would under normal circumstances be considered as falsifying public accounts. …According to a recent study, six European countries – Austria, Finland, France, Germany, Italy and Poland – have an IPD exceeding 300 percent of gross domestic product. …And the kicker? The data cited above are based on the present value of future pensions as of 2006. More up-to-date figures probably won’t be available until the end of 2017. …The issue is no longer when France goes bankrupt, but when Europe does. The level of debt declared in the national accounts is already worrying. With implicit pension liabilities a multiple of that, it appears that a systemic implosion is unavoidable.