Quick Bite – French Govt on Verge of Collapse
If French Prime Minister François Bayrou loses a vote of confidence on 8 September, he will become the 4th French head of government to lose his job in 18 months. He is attempting to rein in the country’s budget deficit with €44 billion euros (A$78 billion) in cuts. France today looks a lot more like Italy or Greece of a few years ago, with a massive debt pile, rising borrowing costs and governments that last months rather than years.
France is a central economy in Europe, and ranks 7th in size globally (coming in just after the UK and before Italy), with a GDP of US$3.2 trillion. It is also central to the European Union’s political ambitions, having built a close partnership with Germany designed to provide a counterweight to the US and Chinese superpowers.
In recent years, however, France has entered a vicious cycle: deteriorating public finances are fueling political fragmentation, which in turn prevents the nation from making hard choices about how to fix its fiscal mess. The economy is already weak, with growth forecasts at just 0.8% for this year.
Fanning concerns was a warning last week by the French finance minister, Eric Lombard, that France may need assistance from the International Monetary Fund if the crisis cannot be brought under control. “I cannot assure you that the risk of I.M.F. intervention does not exist,” he said in an interview on French radio.
PM Bayrou isn’t expected to survive the 8 Sept confidence vote, which would leave President Emmanuel Macron having to name a new prime minister to form the next government.
The more ungovernable France becomes, the more investors are pushing its borrowing costs to levels familiar to Europe’s debt-laden periphery. The yield on France’s 10-year bonds has risen above Greece’s and its borrowing rate is currently neck-and-neck with Italy’s.
Source: Financial Times
French bond yield soars over last month
Source: Trading Economics
Greece and Italy cut their budget deficits after taking painful austerity measures during the region’s debt crisis in the 2010s. Today, Giorgia Meloni is on track to become one of the longest serving prime ministers in Italy’s postwar history after nearly 3 years in office.
For France, pulling out of the spiral is hard because its National Assembly (the lower house of its parliament) is divided into factions, each with opposing fiscal priorities and enough votes to shift the balance of power.
Socialist parties don’t want any cuts to France’s welfare state, which accounts for 65% of public spending. Centrists – allied with Bayrou and Macron – want to boost military spending to counter Russia’s invasion of Ukraine without raising taxes. And Marine Le Pen’s far-right says the government should cut spending by reducing immigration and payments to the EU.
Macron laid the groundwork for the current malaise when he introduced sweeping tax cuts after he was first elected in 2017 without making similar reductions to the cost of French healthcare, education and other public services. He abolished the wealth and housing taxes, lowered corporate levies and introduced a flat tax on capital gains. The combined measures meant that by 2023 the state was deprived of €62 billion in annual tax revenue, or 2.2% of GDP.
The tax cuts helped make France one of the most attractive destinations for foreign investment in Europe, and unemployment fell to 7%, its lowest level in decades. Economic growth initially picked up, helping finance tax measures, but then a series of crises hit: measures to cope with the Covid-19 pandemic cost €41.8 billion, and then Russia invaded Ukraine, sending energy prices higher. Macron responded with €26 billion in energy subsidies.
By then, France was in a deep hole. Debt went from €2.2 trillion before Macron was elected to €3.3 trillion, and economic growth flatlined. Macron refused to raise taxes, and he struggled to trim entitlements. He managed to raise the retirement age to 64 by 2030, but only after a bruising battle with opposition parties and widespread protests.
Last year, France’s 2023 deficit widened to 5.5% of economic output, compared with the government’s forecast of 4.9%. Weeks later, the government had to revise its forecast for its deficit in 2024, raising it to 5.1% of economic output from 4.4%. Ratings firm S&P responded by downgrading France. Conservative lawmakers threatened to help take down the government if it didn’t make more of an effort to rein in spending.
Macron responded by dissolving parliament and calling snap elections, but his gamble failed, and he was left weaker than ever. Without a clear majority in the National Assembly, any piece of legislation, including the annual budget, became a referendum on the government.
Rather than wait to put his unpopular budget to parliament, PM Bayrou has gone for a pre-emptive strike. “Our country is in danger” he said on 25 August. “Dependence on debt has become chronic.”
France’s public debt, at 114% of GDP, is lower only than that of Greece and Italy within the EU. France this year will spend more on servicing debt (€66bn) than on either education or defence.
French public finances are in a dismal state. France has not balanced a budget since 1974. During the pandemic and after Russia’s invasion of Ukraine, Macron’s previous governments spent lavishly on protecting the French from inflation and higher energy bills. This pushed up debt, yet secured no productivity trade-offs in return. The prospect of another French government falling over the budget is unnerving markets. Since 12 August, France has been paying higher borrowing costs than Greece.
It is a sad state of affairs that France’s polarised politics might mean that the government falls – all because politicians of various ideologies cannot recognise that uncontrolled debt and deficits are putting the country’s economy at risk.
