by Joel Brinkley

David Appia, a senior French official and head of the Invest in France Agency, is a friendly, dapper diplomat. And with a smooth, confident tone he told them: "The EU is still the biggest market in the world." What's more, France offers 35 percent to 40 percent tax credits for research and development expenses -- the richest such rebates in Europe. How could anyone resist that?

In fact, France experienced a 20 percent increase in foreign investment. Nonetheless, Appia told me, since then some proposed projects "are being delayed, reduced -- or even abandoned."

France, like all of Europe, is caught in an economic tsunami, and France is teetering at the edge of the precipice. Every week, it seems, presidents and prime ministers hold urgent meetings searching for a solution, culminating with the G-20 convocation last weekend. Still, the problem grows only worse.

Europe "is scaring the world," President Obama warned.

It all started with Greece, of course. You might ask: How can one relatively small country cause so much havoc for everyone, everywhere? It seems so complicated. Put simply, profligate spending and extreme financial irresponsibility produced an astounding debt that now stands at almost 150 percent of Greece's annual gross domestic product -- the world's fourth-highest ratio.

From where did Greece borrow all of that money? European banks. So when the world financial crisis hit and Greece's economy grew ever more strained, those banks refused to lend Athens any more money. Without more loans, Greece couldn't make its debt payments. So banks across Europe began foundering -- spreading the crisis far and wide.

Soon Italy, Ireland, Portugal and Spain began faltering, too -- infecting even more banks in more European states. Over the last several days, ratings agencies downgraded Spain and several French banks, the latest in a cascade of European downgrades.

The Greek government instituted deep budget cuts and austerity measures, but that threw the country into a serious recession, further debilitating its ability to make debt payments -- an important lesson for congressional Republicans in the United States.

That brings us back to France. Before the crisis struck, French banks held more than $670 billion in Greek, Portuguese, Irish, Italian and Spanish debt -- more than any other European country. And, like many European nations, it already had a sky-high debt ratio of its own -- about 83 percent of GDP. (The American ratio is about 62 percent.)

But France still holds an AAA rating -- barely. In late summer, the International Monetary Fund warned that France had the highest debt ratio of any AAA state and had better begin making big budget cuts. President Nicolas Sarkozy just proposed what he calls an "austerity plan."

Well, the problem is, France has the second-largest economy in Europe, just behind Germany. So, as other European states get into trouble, naturally they turn to Germany and France for help. As a result, Paris has agreed to contribute tens of billions to the European recovery fund. But every euro it contributes adds to the state's already-ruinous debt. Meantime its own banks, riven with bad state-debt loans, are in desperate need of big bailouts, too.

That's Europe's problem. Every possible solution contributes to the self-feeding downward spiral, pulling even relatively wealthy nations like France down into the abyss with the rest. And since Europe is the world's largest market, what happens there affects all of us.

This year, through August, the United States exported $19 billion worth of goods to France. But now the French economy has stalled; it is showing almost no growth. When the French can no longer afford all of those American goods, France could begin dragging down the American economy, too. Multiply that times all of the troubled European states, and it's no wonder Obama says Europe is "scaring the world."

Sarkozy's austerity plan is not sitting well with the French. They're accustomed to cozy, socialist employment guarantees. France hasn't had a balanced budget since the early 1970s, and it hasn't passed a budget with no increase in spending since 1945. A few weeks ago, the nation was embroiled in a debate over whether it was appropriate for police officers to sit back and drink a glass of wine during lunch hour. The conclusion: Sure, why not?

Reflecting on all of that, Appia acknowledged, "I am sure some companies will wait a bit and see what happens before making a decision."

(Joel Brinkley, a professor of journalism at Stanford University, is a Pulitzer Prize-winning former foreign correspondent for the New York Times.)



"France Teetering on Edge of Financial Precipice"