France, many claim, is on the brink of economic collapse. Just ask its own government.
Prime Minister François Bayrou – who is set to resign after losing Monday’s confidence vote over his deficit-slashing budget – warned last month that “over-indebtedness” poses an “immediate danger” to the country’s prosperity. Finance Minister Eric Lombard has even suggested that soaring national debt could force Paris to request a bailout from the International Monetary Fund.
Exacerbating the sense of impending doom, France’s government borrowing costs are now higher than Greece’s – sparking fears that Europe could suffer an economic meltdown far worse than the one triggered by Athens’ financial collapse in 2009.
Analysts, however, note that the imminent risks posed by France’s rising bond yields and debt levels are mostly exaggerated.
“To be sure, France is facing a political crisis – but not a financial crisis,” Nicolas Véron, a senior fellow at Bruegel and the Peterson Institute for International Economics, told Euractiv.
Experts point out that the ‘inversion’ in Greek and French bond yields is overwhelmingly due to a sharp improvement in market confidence in Greece, rather than a deterioration in investors’ attitudes toward France. The 3.41% yield on 10-year French government bonds is also well below the 3.50% interest rate paid by Italy, which is not in any immediate financial peril.
Lombard’s claim that Paris could soon require an IMF intervention also “makes absolutely no sense”, Véron said. He added that, in the unlikely event that the EU’s second-largest economy did require a bailout, it would be the European Stability Mechanism (ESM), and not the IMF, that would come to France’s financial rescue.
Weak economy, fragile politics
Rather than imminent economic danger, experts warn that France’s intractable political crisis risks dampening investment and growth over the long term.
The National Assembly is split three ways between far-left, centrist and far-right blocs that will likely remain deeply hostile to one another regardless of who succeeds Bayrou. Surveys also suggest that no faction will command a parliamentary majority if, instead of appointing his fifth prime minister in two years, Macron calls fresh parliamentary elections.
“Either path would inject fresh uncertainty into an already fragile political landscape,” Charlotte de Montpellier, a senior economist at ING Research, recently noted, adding that the collapse of Bayrou’s government will “weigh heavily” on France’s “already weak” economy.
France’s GDP is set to grow by just 0.6% this year, according to the IMF – less than half the 1.4% forecast expansion of the world’s advanced economies.
France’s pace of growth is also projected to remain below the eurozone’s anaemic rate of expansion until 2027, with global trade tensions and geopolitical uncertainty inflicting severe damage on the country’s manufacturing and services sectors.
In addition to hampering growth, France’s political instability is making it harder to bring the country’s deficit and debt levels under control, said Maria Demertzis, who leads the Economy Strategy and Finance Centre at The Conference Board Europe.
France is expected to run a budget deficit of 5.6% of annual GDP this year, according to the European Commission’s latest forecast, which is almost twice the bloc’s official 3% limit. France’s debt-to-GDP ratio of 114.1% is also nearly double the bloc’s 60% threshold.
“One has to ask whether the debt path can remain sustainable,” Demertzis said, noting that Bayrou’s predecessor, Michel Barnier, was deposed after failing to pass a similar deficit-busting budget last year.
“You need to have a credible path in both economic and political terms. Economics is what will get it there, but the politics will sustain the path,” Demertzis said. “But if you’re going to have this political crisis every year and a half, this isn’t an easy problem to solve.”
A silver lining?
Some analysts, however, suggested that there may be a silver lining to France’s political crisis, insofar as the country’s high debt and deficit levels are now a topic of serious political discussion.
“Essentially, you’ve got more than 20 years – you could say a generation, at least – of French fiscal laxity. There has never been a real moment of fiscal consolidation or course correction,” said Véron. “So the fact that the fiscal situation is front and centre of the current French national conversation is, I think, a good thing, not a bad thing.”
Demertzis also noted that the current moment underscores just how critical it is for France to get its fiscal house in order, given that the EU’s own financial institutions, particularly the ESM and the European Central Bank, arguably lack the clout to rescue France’s economy. At €3 trillion, it is roughly twelve times larger than Greece’s.
“The French problem, if I may call it this, is also not a small problem: it exposes the inability of the EU to pick up the slack in the event of a genuine crisis,” Demertzis said.
(vc)
