Austerity is spreading across Europe today as France reveals its 2013 budget plans.
Newly-elected French president Francois Hollande calls it a "combat budget" – and one of the cornerstones is a controversial 75 percent tax rate on millionaires, expected by the government to raise 530 million euros in 2013.
But regardless of the specifics of the budget, France is facing some big problems.
Nouriel Roubini says France is on the cusp right now and poses the question in a recent note to clients: "A core or periphery country?"
Roubini says that France is currently on "honeymoon" with French investors who have cut their holdings of PIIGS debt and rotated into French sovereign debt due to a "home bias."
However, according to Roubini, "many problems are brewing in France" at the moment, and there are a few reasons for serious concern if you're holding French bonds.
Roubini gives four, which we summarize here:
- Growth is stalling and could go negative next year if austerity is enacted . Unemployment is already rising.
- " Hollande was not elected by his base to pursue austerity and reforms, but rather to boost growth and hiring in the public sector, " writes Roubini. Talks of austerity is causing unions to become restless and riots could begin among the poor and affected minorities.
- Government revenues are around 50% of GDP and economic contraction will increasingly put pressure on the deficit. This will make achieving a balance budget through spending cuts extremely difficult.
- Some policy decisions are upsetting the business and financial community. Bernard Arnault left France over talks of a 75% marginal tax rate on the wealthy .
Roubini thinks things look pretty dark for France, and points to recent weak economic data signaling recession. Hollande will have a lot on his plate this fall.
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