The Arab Street Erupts: Why Paris and Why Now?
John Mauldin's Outside the Box

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Introduction

This week's essay is from my good friend Louis Gave. He writes about the current situation in France, offering a very different perspective than we have been seeing in the Western papers. I have long been uneasy with the demographic problems in Europe. My book, Bull's Eye Investing, high-lighted some of the very problems we are watching unfold now. Sometimes to understand the world of investing, you have to have a grasp of the world of politics and society. These are part of the fundamentals that drive our portfolios. I suggest you read this letter with your thinking caps on.

But before we jump to Louis's essay, let's look at a few words from Dennis Gartman this morning on the same topic. If you wonder why the dollar is getting stronger when we have such serious fiscal and trade imbalances, and in which all other currencies in history having reached said imbalances fell sharply, then ponder the words of the writers. Where does long-term capital feel the most safe? In spite of the imbalances, which should concern anyone, the answer is the US. That may say more about the world than any other thought.

I must say Paris is one of my favorite cities in the world, and the French countryside has yielded some of my favorite memories. I hope this situation gets better soon! Maybe it will be the catalyst for some reform.

- John Mauldin

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Excerpted from Dennis:

The US dollar is strong despite the much weaker than expected non-farm payroll report released on Friday (although the revision of the previous month did do much to alleviate the concerns regarding October's modest growth in new non-farm jobs), and of course the political situation in France is perhaps the most important dollar bullish circumstance extant.

The suburbs of Paris are now suffering nearly two weeks of upheaval, and it appears that the ranking political forces in Paris are as confused as the people in the streets are. Sarkozy and de Villepin are supposed to be working together to keep the government ahead of the situation out in the streets of Paris and the surrounding areas but they are fighting one with the other in the news media as the situation in the suburbs worsens. As one of our friends wrote (a bit too hyperbolically we think, but illustrative of the worsening situation nonetheless) "the high-rise slums of the GrandeNation resemb[le] Tikrit on a bad day." Clearly this is not Tikrit, but even so things have gone badly awry in France, and it may be some while before they get measurably better.

The situation in New Orleans and the surrounding areas of Louisiana, Mississippi and Alabama following Katrina was physical in nature; the situation in the "suburbs" and "high rise slums" surrounding Paris is instead largely "psychological." Simply put, the second and third generation of French-speaking Muslims find their lives in France far less secure and far less inviting than do the native borne "European" French. The Muslims are French citizens; they speak French; but they are not of-France. They are not... or at least they believe they are not... treated in the same fashion as those French citizens of generations past. Their unemployment rate is egregiously high and is rising. Amongst the young, the unemployment rate may be near 50% and is intolerable. Worse, given the limitations put upon French industry by the French unions this situation is not likely to get any better in the very long foreseeable future.

Yesterday, police found a gasoline bomb-making factory in a building in Evry, a Paris suburb to the south of Paris. The "factory" contained 150 explosives, gallons of fuel for the "Molotov cocktails" and hoods for hiding rioters' faces according to Mr. Jean-Marie Huet, a senior Justice Ministry official.

Having seen the absurd reports of violence that supposedly took place in New Orleans (reports of hundreds of rapes...even of babies!!!,... shooting at police helicopters, rampaging looters and utter chaos proved to be wholly unproved and in many instances utter and complete fabrications) we do not doubt for a moment that the reports out of France thus far are materially over-exaggerated. Things are bad, but they are not nearly so bad as we are being led to believe by the international media. Nonetheless, France is in trouble.

The difficulty of the situation was made all too clear when we read the comment from one of the leaders of the Muslim Brotherhood there in France regarding what they wish to have happen: "All we demand is to be left alone." The Brotherhood wants to have French gendarmes removed from the Muslim neighbourhoods and for local "emirs" to control the situation and to negotiate an end to the "hostilities." This is utter nonsense of course, and the people of France will not, and cannot, tolerate such nonsense. Order must be restored, and shall have to be restored soon; but not via the rule of the Muslim Brotherhood.

The fear we have (and that of others too we surmise) is that this sort of violence may swiftly spread to other European nations where the Muslim populations have exploded in recent years and where the economic/political situation of those new populations "rivals" that of their brothers in France.

The Institute of Islamic Information and Education has the populations as follows:

Country Country Total
Population
% Muslim Total Population
Muslim (millions)
France59.55 7.5%4.466
Belgium10.259 4.0%.410
Germany83.536 3.7%3.091
Netherlands16.318 6.0%.979
The UK58.490 2.7%1.579

If we had to bet we'd bet then that the first nation where the past weeks' problems in France are "exported" shall be the Netherlands given the large percentage of the population that is Muslim, and given the problems that had already surfaced following the murder of Theo Van Gogh and the rise of the Lijst Pim Fortuyn in '02 and the subsequent assassination of Mr. Fortuyn. The Netherlands has a rather uncomfortably unstable situation that we fear likely to become problematic sooner rather than later in light of the recent problems in France. Certainly this is not supportive of the EUR.

End: Dennis

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The Arab Street Erupts: Why Paris and Why Now?

By Louis-Vincent Gave
November 7, 2005

A number of clients have written us to bemoan our silence on the riots now gripping France. Some emails were asking us the flavors to which Le Monde, or Liberation, newspapers which two months ago were gloating about the events in New Orleans, were eating their humble pies. Other emails focused on how the Western media, which for years had been predicting how the "Arab Street" would erupt in a show of anger against the West, could miss that the "Arab Street" was not in Cairo or Damascus, but in Clichy and Aulnay sous Bois....

We have so far shied away for commenting on the situation, and have not really answered emails for two reasons:
  1. We feared getting emotional (this is a subject obviously close to our hearts) and having our clients think that we were right-wing nut jobs (though most already probably do). To counter such a possible perception, I will thus move away from the usual GaveKal "we", to the Louis "I" for the rest of this paper.

  2. I had written about France's social precarious position in the past; and in essence, there is unfortunately no news in the recent events. And there is little I have not said about this situation in the past few years. Take this piece, entitled Europe's Challenge, written in January 2002:
"In A Study of History, Toynbee contends that historical movements are the consequences of the challenges confronting a society, the role of the elite being to analyze the challenge and find appropriate responses. If the challenge is tackled successfully, the society progresses and finds a new equilibrium. If the answers are not the right ones, the challenges returns, until such a time as the elite can be replaced (revolution) or the society itself disappears (end of civilization).

This analysis was very relevant to Europe between 1860 & 1960 when the challenge was nationalism and the Franco-German rivalry. After three wars did not settle the problem, a new elite (Monnet, Schuman, Adenauer...) rose to the forefront and came up with European integration.

In the midst of the excitement and buzz generated by the launch of the single European currency, we feel it important to highlight that Europe today faces a serious challenge. And this challenge is certainly not the old Franco-German rivalry, with Great Britain arbitraging.

The challenge is demographic and sociological in nature: how to make an old and rich society co-exist with young, poor and desperate societies, in the same geographic zones, in the knowledge that there can be no military solution? The implosion of social welfare systems, immigration, internal troubles, deteriorating educational systems...all of these problems are rooted to some extent in the demographic collapse of Western Europe.

Polishing up the old solutions of further European integration (as is now happening in Brussels) that worked for the purpose of keeping Europe at peace will do little to solve today's challenge. Focusing on the wrong question (eg: France's obsession with "l'exception culturelle") is also of little help.

We do not know how the European elites will react but we do know that defensive answers (protectionism...) will not succeed. Tackling a historical challenge requires imagination, optimism and courage; and on these qualities, we venture to say that the current batch of European leaders do not score high marks..."

Reading the French media today, one gets the feeling that the situation is an unsolvable problem. France, we are told, is an ageing society. Immigrants congregate in the "banlieus" where there is little hope (40% unemployment), little respect for the Law, and few French natives living there. As such, the immigrants are not assimilated. When the children go to school, instead of having 5 North African or African children in a class of 25 French natives, the ratio is inverted, so that the integration simply can not happen. The children grow up feeling excluded, resentment builds and by the time adolescence is reached, the resentment has blossomed into a full fledged hatred of France.

Even before this year's riots, this much became visible when, in 2002 at a France-Algeria soccer game in Paris, the 70,000 strong crowd of young North Africans from the Parisian suburbs booed the Marseillaise (our national anthem), and pelted Zinedine Zidane, the genial French play-maker originally from Kabylie in Algeria, with bottles, cans etc... Zidane, a role model for success and a testimony on how poor immigrants can make their way out of the ghetto was castigated for having "sold out to France", instead of being celebrated for his successes.

In such a situation, the French politicians are currently wondering aloud, what can one do? Surely the answer can not be to beat these young men into submission and into loving their countries. Sticks can break bones but they can't win hearts... Would it not be better to try bribing them instead?

The problem is that the bribing game has been tried for a while now and visibly yields few results. For example, France already has a 'minister for social cohesion' (Jean-Louis Borloo, one of the government's supposedly heavy-weights) and a 'minister for the equality of chance'. Which other country in the World sports two ministries whose entire task is to listen, and pander, to the grievances of a disaffected youth? And, given recent events, what kind of returns have we (French tax-payers) had on these investments? The bribing isn't working. It never does.

But when this is pointed out, I am immediately told that "beating the kids into loving France" will not work either. To which my usual answer is: "Really? Well, it used to work. And I know because I use to carry the stick".

To explain what I mean, let me backtrack ten years. At the time, I was an officer in French infantry. Every year, our battalion, just like most battalions across France, would get a fresh batch of new conscripts. Our job, as officers, was to train these young men, usually aged 18 to 21, and make soldiers out of them. And sometimes, one needed to talk loudly or carry a stick (though fortunately for me, I had an amazing 40 year old Sergeant-Major who took a natural joy in doing the shouting and stick-carrying).

The young men we had to train came from all sorts of background: young kanaks from New Caledonia, young Arabs from the ghettos, farmers from the Cantal... Most of them came in dragging their feet. Some of them were afraid. Others defiant. Some of them could hardly read and write. Some were bright. Others less so... But by the time the Army was done with them, most of them had become true Frenchmen. They knew their national anthem. They knew how to salute the flag. They knew how their forefathers had died in battle; and they had learnt to respect that self-sacrifice (the Tirailleurs Senegalais, the Algerian Harkis, the Moroccan Zouaves... often covered their units in glory on behalf of France).

Sometimes, after a year, though the Army was done with them, some of these young men were not done with the Army. Some volunteered for extra service because they knew that a return to the ghettos would see them dead, or in prison. Others had learnt tasks (truck-driver, cook...) which they could take into the private sector for gainful employment.

For many young men, the French Army had become a last chance. And this last chance was extremely valuable for all the young immigrants, who, as mentioned above, are simply not being integrated into French society through school, or their environment. The Army taught these men that one did not need to be born French to be French. After all, the unofficial motto of the Legion is "français par le sang verse" (French by the blood spilled).

Finally, the mandatory military service rendered one more function: it took off the streets each year a number of 18-21 years old and focused their natural aggressiveness on military training. And as we know, most crimes are committed by 18-21 year olds. So getting the young men off the streets and into military barracks, helped maintain crimes rates lows.

So the idea that the "stick" does not work is absolutely wrong. It works. We've used it. And we have seen the wonders it can do to young men of 18 who had, until then, never been given a taste of discipline. The problem with the stick, of course, is that it can't be given in short bursts. One doesn't teach discipline in a few hours...

Which is why I personally pin the blame of the current situation squarely on Chirac's shoulders. He decided to do away with military service; and now the chickens (and the cars, and the public buses...) are coming home to roost.

In the 1995 presidential campaign Chirac, campaigned as the candidate for change against Edouard Balladur and Lionel Jospin (though he had been at the forefront of the political scene since being named PM in 1974). Amongst the many changes Chirac promised was an abolition of the National Military Service. He argued that:
  1. Given the modern world's needs for highly trained, elite troops, relying on a conscript army made no sense.

  2. The military service cost France a lot of money each year, for little military value.

  3. The universality of the service was a sham with only the "poorer" kids forced to enlist while the "richer" kids usually found ways to avoid serving.
That last point was undeniably true. Out of my generation, I could count on one hand the number of guys I knew who did their duty and served. Most found ways to avoid what was mostly considered a waste of time.

But of course, that last point totally bypassed the fact that, for a number of young men, the army was a last hope. A last stop before a life of ill-discipline, petty crime, drug abuse, prison, etc... Removing the military service did little to the upper and middle classes (they were increasingly not serving anyway); but it destroyed an avenue of possible social advancements for the bottom social classes.

Worse yet, just like the "35 hour work-week" law (passed in 1997) intrinsically assumed and conveyed the notion that work was a constraint to be avoided as much as possible, the removal of mandatory military service also created the impression that taking arms to serve one country's was a chore. Chirac framed the debate as if military service was a constraint, instead of an opportunity, and that he, in his great wisdom and generosity, would remove that constraint from people's lives.

Needless to say, hindsight is always twenty-twenty. Though at the time I did have misgivings about the change in policy, I was also a keen Chirac supporter (I realize that one can only be betrayed by one's own but it was hard to foresee the depths to which Chirac would later sink); and so happy to go along with the reform. In military terms it made perfect sense. France needed a professional army. And more importantly, the Army needed more money...

Debating this issue at the time with my Sergeant-Major, I was told two things.
  1. The Army will not get more money anyway. We only get money in crisis times; the rest of the time, our budgets get cut.

  2. Politicians should not mess with the social fabric of a country. And the military service, since Napoleonic times, has been an intrinsic component of French society.
Pushing him further, he snapped and told me: "my lieutenant, in ten years time, when we have civil wars in our streets, you'll remember this conversation".

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That was ten years ago, almost to the day...

In the end, Chirac carried the day, partly thanks to a large majority of young voters. Chirac immediately followed through on his promise to stop the military service (one of the few promises he kept). And today, we are living with the consequences of that reform. Politics is all about the law of unintended consequences and as the dust settles on this reform, it has become obvious that the end of the military service was not a great gain for the French Army. But, through rising crime rates, increasing marginalization of our immigrant youth, growing despair in our suburbs... it had been an undeniable loss to France.

So what does the current situation tell us about the future? And what options does France now have? France really has two options.

The first option is to continue bribing the barbarians who live "at our gates". That's what Rome did for centuries. But one day, the barbarians figured out that Romans had turned their back on their past of citizen-soldiers. The barbarians took Rome. So that's not such a happy precedent.

The second option is for France to return to its past of citizen-soldiers, and return to integrating its minorities through the ranks-since the integration is not being done at schools. Unfortunately, this second option is not even being discussed, because no politician wants to run on a platform of re-introducing the military service.

Until this second option is being implemented, we will re-iterate what we have said for a number of years: France, and the other European countries with deteriorating demographic pictures, are not as safe a place for capital as they were in the past. And this is still not reflected in risk premiums.

Conclusion

Your thinking of better times in France analyst,


John F. Mauldin
johnmauldin@investorsinsight.com

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Posted 11-07-2005 2:08 AM by John Mauldin