In our recent Special Report, A “Two Euro Solution” to a Terminal Illness, we argued that France straddled the divide between the over-spending and over-borrowing periphery and the more disciplined core of the eurozone. We ultimately felt that France had more in common with Spain and Italy than it did with Germany, Austria, the Netherlands and Finland.
The state of the French economy is a matter of particular concern because if contagion were to spread from Spain and Italy to France, an already unmanageable crisis would grow vastly out of proportion to any possible policy tool available to mitigate it. Spain and Italy are already too big to bail out, but a rescue for France is unthinkable. Moreover, the credibility of existing rescue mechanisms depends on their being backed by the more stable core. France may not be in good enough shape to support itself, let alone prop up the periphery.