On Sunday, France will elect its president for the next five years. It will almost certainly be close. Emmanuel Macron, the centrist incumbent, looks to be slightly ahead of Marine Le Pen, his far-right challenger. Markets will breathe a sigh of relief if he scrapes home. But hold on. In reality, whoever wins, France’s massive debts are starting to pose a systemic risk to the global financial system – and that is not going to go away whoever takes charge of the Élysée Palace next week.
In many respects, Macron has been a decent, if hardly spectacular president. That may have obscured the extent to which France has quietly turned into one of the biggest debtors in the world. Macron may have talked about balancing the books, but under pressure – first from the gilets jaunes protests, which could only be brought under control with higher state spending – and then by the pandemic, he has spent on a vast scale even by the standards of a country where the state already accounted for more than half of GDP. France’s total debts are starting to become frightening. Its debt-to-GDP ratio was under 100% when Macron took office, but it is now more than 115%, far higher than major rivals such as the UK (at 94%) and Germany (a modest 72%).
Not just the pandemic
Some of that is accounted for by emergency measures to cope with the pandemic, and spending will come down as those steadily get wound up. But France also has one of the highest structural deficits in the developed world, estimated at between 3% to 4% of GDP, and attempts to reduce that – for example by reducing state pensions or pushing out retirement ages – are typically met with riots and a government climb down. It is hard to see how the books will ever be balanced again.
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Just as alarming as the ratio is the total amount of accumulated debt. France now owes a staggering $3.3trn, and that is expected to rise to close on $4trn by 2027 as the country carries on spending more than it raises in taxes year after year. That is the third largest national debt in the world, after the US and Japan, and even worse it is owed by a country that does not even have control of its own currency. Unlike Japanese debt, or indeed Italian debt, mostly held by domestic investors, France’s is traded widely, with more than half of it held in the rest of the world. In short, financial institutions everywhere are loaded up with French bonds, complacently assuming they are safe forever. But that can hardly be taken for granted.
Delaying the inevitable
It’s true that Le Pen may have ditched her plans to leave the euro and restore the old French franc. That really would have rattled the markets. And yet, there can be no question that she would still be very worrying for the sovereign debt markets. She is running on a populist platform, heavy on spending promises, national sovereignty, and opposition to rule from Brussels. In office, she might well return to the threat to restore the franc, and she would definitely be locked in constant battles with the rest of the EU, much as the Poles and the Hungarians are.
It won’t be that much better if she loses. A re-elected Macron will quickly turn into a lame duck. He has no real party base, no clear successor, he can’t run again in 2027, and at best he probably has limped across the line to victory with a narrow win and not much of a mandate to reform anything. The markets will quite rightly start fretting about what will happen to French politics when he is gone. And by then, of course, the total debt will be even higher.
In reality, anyone holding vast quantities of French government paper will have to take that into account, just as they did for Greek and Italian debt during the eurozone crisis of 2011 and 2012. Any kind of wobble in the French debt market will ripple out around the world very quickly. The political risks around French debt are now a ticking time bomb underneath the global financial system. It is going to blow up one day – and that will be true, whatever the result on Sunday.
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