If our neighbors across the Channel are amused by our political debacle, they should reconsider. "France's instability also has implications for Britain," Mohamed El-Erian, Allianz's chief economic adviser, wrote in an op-ed published Tuesday, October 7, by the Financial Times. The economist highlighted the recent rise in yields on British government bonds.
The yield on British sovereign debt reached 4.75%, compared to 3.53% for France. Generally, the higher the yield, the riskier the borrower is perceived to be. Since May, the yield gap between the two countries, also known as the spread, has narrowed, reflecting a relatively improved outlook for the United Kingdom among investors. However, the spread has begun to widen again in recent days.
"As vulnerable as France looks right now, it may be arguably less worse off than the UK if bond markets were truly to lose patience with fiscally-loose countries," El-Erian wrote. The reason is clear: British debt is not protected by the European Central Bank.
Nor can post-Brexit British industry take refuge in the European Union's "panic room." On Tuesday, when Brussels announced its intention to halve steel imports into Europe and impose 50% tariffs on imports above the quota, anxiety mounted among British steelmakers who export 78% of their output to Europe.
In May, the UK negotiated a 25% tariff on steel entering the United States. Although London had hoped for a better deal, it is still better than the 50% tariff imposed by the EU. Ultimately, the boomerang effect of the trade war hit struggling British blast furnaces head-on. What will happen if the EU erects barriers around its automotive market?
The takeaway is that, however weak Europe may seem compared with the dominant blocs, and however worrying France's public deficit trajectory may be, the worst outcome is isolation. In an era of every-nation-for-itself, it doesn't take much to end up as collateral damage.
Translation of an original article published in French on lemonde.fr; the publisher may only be liable for the French version.