Europe: the wisdom of markets?

Does any idea or any fact have meaning any more to the bond markets? to the ratings agencies? As the markets close in Europe today that is a critical question.

Once upon a recent time the prospect of a conservative government replacing a socialist one would have made investors feel confident in a country. On Sunday, Spanish voters are poised to replace the Socialist government of Jose Luis Rodriguez Zapatero with a right-wing government led by Mariano Rajoy.

If opinion polls are right election won't be close. Rajoy is a budget-balancing, austerity endorsing conservative. Are the bond markets happy? Nope. Today the yield on a ten-year Spanish sovereign bond reached 6.34 percent, the highest level since the euro was formed.

Growth figures for major euro zone economies were released today. Germany is growing at 0.5 percent and France at 0.4 percent. As the FT notes that means the euro zone's two biggest economies are growing at roughly the same rate as the U.S.A.'s and a little more than Britain's.

So why is there such a wide spread between French bond yields and those of Germany, not to mention between France and Britain and France and the U.S? More to the point, why has some think-tank in Brussels, the Lisbon Group, published a report today claiming that France doesn't deserve its AAA rating? The Lisbon Group rates Estonia higher – and Estonia has an unemployment rate some where above 13 percent.

Yes, French banks have exposure to Greek and Italian sovereign debt – and the country has its own debt problems … but its political system is not at war with itself – as in America, nor is its government following an austerity program that has raised unemployment to a 17-year high as in Britain.

Is it because people in the Anglo-American bond markets just don't like the French?