There's something missing from the eurozone crisis.
By now, we're all getting very used to hearing about Greece, Italy and Spain's problems. We also hear plenty about how irritated the German establishment is with its feckless neighbours.
But France the second-biggest power in the eurozone - has been keeping a surprisingly low profile. Since the presidential election in the late spring it has fallen from the headlines.
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Those who expected new President Franois Hollande to pick a fight over austerity measures have been disappointed. Indeed, some have described his budget which was announced on Friday as the "toughest in decades".
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Trouble is, it's tough in all the wrong places it will squeeze growth without fixing France's debt problem. That could leave an already heavily indebted France looking more and more like one of the dodgy peripheral' countries that everyone is so worried about.
So while we like European stocks in general, the French market could be in for a hard time when the next panic rolls around
The French budget: lots more tax, and a little less spending
Franois Hollande has come up with plans to cut France's deficit the amount the government spends over and above what it gets in taxes each year to below 3% of GDP by the end of next year. It's currently around 4.5% of GDP.
In all, it means finding €37bn in savings. That might sound like a recipe for pretty severe austerity measures. However, the trouble with his budget is that he plans to do most of the heavy lifting by raising taxes, rather than cutting spending.
The budget raises the top rate of income tax from 45% to 75%. It also increases the number of people who have to pay a wealth tax. These measures are supposed to raise around two-thirds of the €37bn. The other third comes from public spending cuts. It also increases the number of people who have to pay a wealth tax and raises business taxes.
Why is this a bad idea? Because these tax increases may not bring in any extra money. The economist Arthur Laffer came up with theory of the Laffer curve'. He argued that, as income tax rates begin to rise, people adjust their behaviour by working less they don't see the point, basically. Eventually the lost labour outweighs the impact of the higher rate.
Of course, there's room for debate about the point of maximum revenue. For example, the British government claims that keeping the UK's top rate of income tax at 50% would have brought in little or no money, whereas most economists think that rates as high as 65% (the amount suggested by a 1995 study) might raise extra funds. However, there is a consensus that 75% is too high.
Wealth taxes are also a bad idea because they encourage people to move their assets outside the reach of the taxman. As my colleague Merryn Somerset Webb points out, most attempts to tax wealth other than through inheritance and property have either failed or have had to be scaled back.
The lack of borders in the European Union makes this problem even worse. Already several wealthy citizens have threatened to leave France. Earlier this month, the chairman and chief executive of LVMH Moet Hennessy, Bernard Amault, caused uproar when he took out joint Belgian citizenship.
Meanwhile, many French citizens in the banking industry and business are thinking of moving to London. Earlier in year David Cameron said that those fleeing the new top tax rate would be welcome in the UK.
French bond markets could be next to see turmoil
Even as taxes are raised, Hollande has few plans to cut state spending. Indeed, the latest proposals assume French spending remaining at 56% of GDP in other words, the state doesn't shrink at all. As Ambrose Evans-Pritchard puts it in The Telegraph, France has a Nordic-sized state, but "without Nordic labour flexibility or Nordic free markets."
This means that France's national debt is likely to continue to climb. Indeed, it is hovering around the critical level of 90% of GDP. While this doesn't necessarily spell doom, it is seen as the point beyond which it becomes significantly harder for a country to deal with its debt problems, as the weight of the debt starts to inhibit growth.
The weak short-term growth prospects for the French economy are likely to make this even worse. Even the government now thinks that overall growth will be just 0.3% this year and less than 0.8% in 2013. However, even those predictions are seen as too rosy. Other economists see GDP rising by 0.1% this year, and a similarly weak figure next year.
Aggressively raising taxes will only make growth even harder to come by. In short, says Pritchard, Hollande "has served up the most drastic retrenchment in forty years, at the worst possible time, and in the worst possible way."
So, overall, the French economy is a lot more vulnerable to disappointment than most. Investors still price it as a core' eurozone economy, but in many ways it's more like one of the troubled southern countries. We may not see a bond market panic over France in the near future too many other nations are in a worse state but there's more scope there for disappointment than in most markets.
While we like European stocks in general just now, we'd favour Italy where expectations are far lower over France. And for those who feel adventurous enough to try shorting a stock, luxury goods giant LVMH (Paris: MC) could be hit particularly hard.
Up until now, its sales have been growing strongly. However, increases in the top rate of tax will hit its customers' purchasing power. At the same time, the Chinese hard landing threatens its sales in Asia, which makes up an increasing portion of its revenue.
Do bear in mind that short-selling is highly risky, so you should only attempt it if you are confident you know what you are doing. If you're interested in learning more about spread betting, sign up for our free MoneyWeek Trader email here.
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