slipcover madella: In defence of the French ? Telegraph Blogs

Allez Les Bleus.

If you comb through the French blogosphere and the comment threads of Le Figaro and Le Monde, you will be struck by how many posters are disgusted with their own government for lobbing a hand-grenade across the Channel.

Hatred of Britain is not much in evidence. On the contrary.

Enough has already been said about the conduct of the Governor of the Banque de France, and about the young man who ? for mystifying reasons ? is now French finance minister.

I will only add that Mr Noyer is very confused if he thinks that Britain should be downgraded because of its higher inflation rate. The rating agencies evaluate default risk consisting of contractual non-payment.

Countries that pursue stealth default through inflation devalue the real burden of their debt and therefore reduce the risk of technical default. This is well understood by the markets. They actually improve their rating potential ? so long as they don't push their luck and go
too far.

(The looming danger in Europe is in any case deflation. The EMU money supply is contracting. That really does raise default risk.)

The deeper point is that Britain has the shock absorber of its own central bank, acting as lender of last resort.

In other words, there is an implicit rating discount on EMU membership. Neither Noyer or Baroin, or Fillon for that matter, seem to understand this. Perhaps they cannot do so, given what it implies about the nature of monetary union.

Sterling has been able to take the strain for the UK instead of the debt market. This has been the side-effect of a 20pc devaluation (or is it now 15pc as sterling claws back?).

British household debt (100pc of GDP) is much higher than in France (52pc), but most of that is mortgage debt in a market with a chronic shortage of housing. The debt is mostly structural.