France is facing an unprecedented political and fiscal crisis characterized by a ballooning debt, unsustainable social spending, and chronic political instability, which is hindering its ability to address fundamental economic problems and potentially destabilizing the Eurozone.
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In 2019, France watched a national treasure
go up in flames.
Now, there's a fear
that the structures holding up French politics are
starting to catch.
There is clearly a problem with French public finances.
Further worsening of the budget deficit.
France's political crisis deepened today.
Most French citizens adore their nation's system
of social safety nets,
but those programs have become increasingly unsustainable.
France has the Euro area's largest deficit, massive debt,
and every attempt at reform has ended the same way.
Surprise resignation from the Prime Minister.
Four prime ministers in 20 months.
We're heading into our fifth prime minister now
in two years.
French politics is in a bit of a mess.
It really is an unprecedented crisis.
Benefit reform sparks this...
Unions break out the flares...
And fragile coalitions collapse under the strain.
France is currently characterized
by political blockage due
to a very difficult public finance situation.
What people talk about is sort of, a gradual sort
of suffocation of France's ability to deal
with its fundamental economic problems.
History suggests that at this point it's more likely
that only a shock can force change.
The question is what or who would deliver it?
The French government has a long history of running up debt.
Last year, France paid about 60 billion euros in interest
alone, which is about equivalent to its defense spending.
We're on course for a hundred billion a year in debt
servicing costs by the end of this decade.
We live in a world where all countries are taking on debt
post-Covid, but I think France is definitely a
concerning standout.
You can see just how grave the debt burden is
by comparing it to Germany's over the last 20 years.
What you see is that they are more
or less at the same level until the global financial crisis
and then both their debt burdens start to increase,
but France's increases further.
And then you get to the Eurozone debt crisis,
and while Germany manages to correct
after the crisis, France's debt burden just keeps ticking up
and that has sort of happened again in COVID.
And actually it's likely to continue
to increase in the future.
If nothing is done it can only increase.
There were some forecasts that say that the debt-to-GDP
ratio will reach 125%,
but other forecasts are pointing
to 150% in 2035.
Meanwhile, those tens of billions
of euros in interest payments must continue.
That's money that can't be spent on what the public expects.
France is characterized by a very high level
of public spending, around 57% of GDP.
The euro-area is closer to 50%.
Germany is below that. The UK is below that.
The US is closer to 40%.
One of the key challenges to that is the sort
of almost sacred role
of the social security system in France.
This idea that the French state is responsible
for ensuring equality,
and solidarity, fraternity between citizens in education,
in health, unemployment insurance and pensions.
So protecting the people
and protecting mostly the oldest people in the country.
So 60% of those public spending is going
to the oldest people in the country.
Pensions are one of the main reasons France's debt keeps
rising and markets keeps sweating.
What might be a private pension system in other countries
runs through the balance sheet of the French state.
For a lot of people it can go above 3000 euros a month,
France, so it's much higher than the wage on average.
So it's very important for public opinion.
They are very protective about this.
Protests erupted across France in 2023 when the government
raised the retirement age from 62 to 64.
More than half a million people march across France.
Macron and the government are attacking one
of the central rights of the working class.
As the society gets older
and as the working population relative to people out
of work shrinks, it basically costs a lot more to keep
that coverage going.
So now France has rising debt, swelling pension bills,
fewer workers and shrinking tax revenue.
In finance, this is what's technically known, as not ideal.
Now, in a perfect world, you'd fix this with a mix
of higher taxes, lower benefits
or short term borrowing until growth catches up.
But, and sorry if this comes as a depressing surprise,
we don't live in a perfect world.
We know also that from an innovation point of view,
Europe is really much struggling to catch up.
So for now, France keeps borrowing,
but lenders usually shy away from heavily indebted
politically gridlocked countries.
And because about 60% of French debt is held abroad,
France is especially exposed to swings
of investor sentiment.
I think you can see from, for example,
credit downgrades recently, a lot
of concern from rating agencies
and debt investors to the direction of travel
of French public finances.
Now that has a kind of, a feedback loop,
because as bond investors lose confidence, they tend
to sell the bonds and that drives up the
borrowing costs for France.
- It shows up clearly in the French-German spread,
the premium France pays to borrow compared with Germany,
the Eurozone's benchmark.
So they're borrowing around 2.7%.
France is around 3.5%.
So that difference is 0.8 percentage points
or 80 basis points.
That is the measure of the spread. So why does that matter?
The spread is this sort of extra cost for the French state
to finance itself.
But it's important also because
that has a ripple effect through the economy.
It has a big bearing on mortgages, on consumer loans,
on loans that businesses need to invest.
And so the spread is the price
that the whole French economy plays
for the political instability, for the uncertainty.
So, a large number
of French voters won't accept reduced benefits,
but the state can't afford them and borrowing costs are
therefore on a tear.
Why is this so hard to fix?
France has been in uncharacteristic political instability
since the snap elections in 2024.
You need to understand two things.
France has a president, that's this chap,
but it also has something of a problematic addiction
to switching prime ministers.
I think we are at the fourth one, or fifth one.
It's hard to keep count actually here.
So, Edouard Phillipe, Élisabeth Borne.
She was then replaced by Gabriel Attal.
Barnier.
Barnier was brought down in a no confidence vote.
Then Bayrou.
That's four.
And now Sébastien Lecornu.
In fact, Sébastien Lecornu has resigned
and then been reappointed.
So in some respects we've had six prime ministers
that have tried to reckon
with this very unstable political situation.
That is leading to a stuck parliament
that cannot find agreements
and that cannot make reforms that are needed in order
to solve the very big issue of the public finance situation.
Because everybody has their eye on the next
presidential election.
Nobody wants to be seen to be pushing
through unpopular measures for a budget.
Things like exhibit A...
You still have two thirds of the French
opposed to the pension reform.
So that's why we just keep getting this instability.
It's because France needs a budget,
but France can't actually get one together.
The political stalemate is also preventing Eurozone unity
in the face of outside challenges.
Europe is in a situation where it needs to go toe to toe
with China and the US.
The world needs a credible and strong Europe
and you can't have a credible
and strong Europe without a credible and strong France.
France, along with Germany really is the core
of the Euro together.
They make up half of the euro-area's GDP.
France also is the biggest food producer in the EU.
It has the biggest army and it has nuclear weapons.
Many experts say only the 2027 presidential race can break
the impasse, but that too is a source of anxiety
for markets and world leaders.
We know that in 2027, Macron is gone.
So who will replace him?
All parties are thinking about the presidential election.
They are all like positioning themself for the campaign.
The far-right is potentially on track
to win the next election, whether it's parliamentary,
but especially presidential.
That could really pressure the Euro area.
I mean, you look at the national rally,
Marine Le Pen's party has done it very well in recent
legislative elections.
Both the far-left and the far-right are proposing a lot
more spending and they both would double down on the current
problems without really tackling them.
I think that it would be quite a challenge
for European partners
and the Euro if you had France go in this direction.
So is there any optimism to be found while we wait?
To be fair to Macron, he has had a lot
of success in pushing through
what we call structural reforms to, you know, make it easier
to invest or easier to hire,
more flexibility in the labor force.
And amid the gloom, Notre Dame endures, a reminder
that France can find unity when it needs it most.
The restoration of Notre Dame Cathedral is really one
of the few good news stories that's come out of France.
Macron made a promise
that in five years time the cathedral will be reopened
and restored, and he kept that promise.
I think down to a few reasons that might apply
to the current crisis facing France.
The first is, Macron set a deadline
and stuck to it, that takes leadership.
Secondly, in all of French society, right up
to the ultra-rich gave money to help fund the restoration.
And finally, there was a real willingness to think
outside of the box.
Not every onerous building regulation was followed.
There was a lot of creativity and a lot of seriousness,
and I think that that could help a political crisis like
this one.
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