From France Finance and politics are in turmoil. President Emmanuel Macron has just appointed his fourth prime minister in 12 months, with the deficit out of control, borrowing costs rising and parliament cannot call a majority to settle spending.
It is a serious campus for the main industrial force of Europe’s second largest economy.
This is the method France Finding yourself in this state:
France The last time the budget was balanced in 1973 and maintained a generous welfare state with strong worker protection. Over the years, steady economic growth has incorporated taxes into government stocks and has put the deficit into failure. First served as Minister of Economy and then as president from 2017, Macron took steps to improve growth and national finances, cut taxes, spending, and raise the retirement age from 62 to 64.
Cumulative debt is high – more than 90% of annual GDP have exceeded 90% since 2008 – but due to steady growth, it has grown steadily for most of the past decade, near zero interest rates and controllable From France A reliable credit rating makes it based on favorable conditions.
Then there was the pandemic, followed by an energy crisis after Russia invaded most of Ukraine’s natural gas supply in 2022. The government has spent a lot of subsidies to keep businesses floating and protect consumers from high prices and electricity bills. Meanwhile, interest rates have changed globally, making them suddenly higher.
Almost overnight, a bunch of accumulated debt jumped: from 98% of GDP before the pandemic in 2019 to 114% in 2020. Last year’s annual deficit exceeded forecast to 5.8%, far higher than the 3% limit under EU rules.
France In recent years, it has been almost more than just debt. Its debt pile accounts for 152% of GDP than Greece’s debt, while Italy’s debt pile is 138%. It is also below 119% in the U.S. FranceBut there is a lack of the advantage of the U.S. reserve that supports Washington’s borrowing capacity, while Greece has been on a budget surplus after being released on bail, while Italy reduced its deficit last year. Greek 10-year bonds now earn 3.3%, indicating that the market believes they are less risky than From France.
Macron summoned a new election last year after his pro-European party defeated the European Parliament elections in the Marines’ anti-immigrant nationalist party. The situation in the new French parliament fell sharply, and the left coalition faced Le Pen’s party, with the centrist in the middle. The majority that has no operational – except for Prime Minister Gabriel Attal, Michel Barnier and Francois Bayrou, who are speaking “no” quickly and continuously.
tax France It is 43.8% of GDP, the highest in the EU. The expenditure is also very high. The money goes to pensions, the salaries of civil servants, and recently increased defense spending due to increasingly aggressive Russian threats.
Today, interest rates are much higher, with interest costs reaching €67 billion, which is the money spent on schools, pensions or wasteland care. High taxes give rise to increase without hurting growth.
A big deficit, France Zsolt Darvas, a senior researcher at the Bruegel think tank in Brussels, said some tax increases and cuts will have to be made in the coming years, accounting for 5% of GDP. This is feasible – Greece has done more after the debt crisis of 2010-2015 – but it is a heavy move for any government.
And it hasn’t happened yet. The National Assembly frustrated Bayrou’s plan by putting finances into practice by eliminating two public holidays and cutting spending of €44 billion ($55.4 billion), overturning him in a vote of confidence and leaving investors wondering when to face a legislator deficit. Macron appointed Sebastien Lecornu as Bayrou’s successor on Tuesday.
When the government spends more than taxes, they fill the gap or annual deficit by selling bonds to investors. When the debt matures, the government pays it back by selling new bonds (usually good for good) – as long as bond investors believe in the government’s management of the financial situation.
The Parliamentary Stalemate eroded that confidence. As a result, the market demands higher interest rates for French lending to compensate for the additional risks that the political log will continue, the deficit will remain at a higher risk, and the bonds will enjoy value, or – still unlikely – France Probably no payment at all.
External situation France What must be avoided is the death spiral, where investors suspect that borrowing costs have increased, while high borrowing costs have increased deficits and increased investor suspicion in a self-reinforced cycle of doom, such as those who indulged in Greece and threatened Italy in the early 2010s.
“The real financial crisis, with a self-enhanced cycle of doom… remains impossible for the time being,” said Holger Schmieding, chief economist at Berenberg Bank. “Of course, we can’t completely rule it out.”
He said the risks could rise if lawmakers “continue to reject common sense and stick to unmaintainable requirements.”
His basic case is: France “Continue to confuse” with moderate growth, higher borrowing costs and smaller deficits.
In extreme and unnecessary market panic From France The European Central Bank’s borrowing capacity can intervene by purchasing French bonds and reducing government borrowing costs to sustainable levels. However, countries with the ECB’s “reasonable and sustainable” policies retained this aid, meaning central banks will not bail out politicians who refuse to act.
Eurozone Relief Fund, European Stability Mechanism and the International Monetary Fund are also applicable. Their help imposes stricter spending and policy conditions, and France Regardless, fiscal adjustments are still necessary.
Economist Dalvas says no rescue plan can save France Had to bite the bullet. “It’s hard to imagine FranceIt is such a big and proud country that will be in the hands of ESM and IMF,” France Financial adjustments will be required. ”
