"The French economy has been getting away with fiscal murder for a very long time,” Raphaël Gallardo of Carmignac Gestion tells Bloomberg. For much of Emmanuel Macron’s pro-business presidency, France has been something of a market darling. But with a debt-to-GDP ratio of 111% and an annual budget deficit worth 6.1% of GDP, the country faces a stunning fall from grace. French government bonds have spent the past 15 years in a sweet spot, says The Economist. Global investors are keen on European debt. But the continent’s troubled southern economies were perceived as too risky, while tight-fisted northern states such as Germany and the Netherlands don’t issue many bonds. French debt fitted the bill.
How does the rest of Europe compare to France?
Things have changed. Southern Europe has been benefitting from a tourism-led growth boom, helping Greece, Portugal and Spain to get their spending in order. Once regarded as a proxy for ultra-safe German bunds, French debt is now priced less favourably than that of Spain or Portugal. In a more competitive European debt market, France’s “weak growth” and “volatile politics” are not very attractive. Its state spending equates to 59% of GDP, the biggest share in the OECD club of rich economies. Paris is paying €50 billion a year to service its debt load, a figure that could hit €80 billion come 2027, says Liz Alderman in The New York Times. The fiscal deterioration has been driven by spending sprees in response to the successive blows of Covid and the 2022 energy shock. An economic slump in Germany hasn’t helped.
Macron’s decision to call early parliamentary elections this summer triggered a market re-think. The vote resulted in a hung parliament, with a national assembly split between mutually loathing left, centre and right blocs. Conservative prime minister Michel Barnier, who leads a “fragile” minority government, has an unenviable task. He needs to pass an austerity budget totalling €60 billion in cuts without displeasing either Macron’s centrists or Marine Le Pen’s party, on which he depends for tacit support. Barnier says that two-thirds of the “adjustment” will come from spending cuts, with a third from tax hikes on businesses and the wealthy, says Jean Pisani-Ferry on Bruegel.org.
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France’s fiscal watchdog disagrees: it calculates that, in reality, 70% of deficit reduction will come via new taxes. Tax hikes have been a red line during Macron’s presidency, but now that legacy risks being squandered. Equivalent to 1.2% of GDP, the planned retrenchment risks sinking an already “precarious recovery”. Growth is projected to hit just 1.1% next year, a far cry from the 5% figure France enjoyed during the post-1945 years of the Trente Glorieuses, or even the pre-financial-crisis norm of more than 2%, says Jean-Marc Vittori in Les Echos. Since 2008, growth has averaged a mere 0.9%. France hasn’t endured such a prolonged peacetime slump in living standards since the 19th century. After the economic “roller-coaster” of the pandemic and Ukraine, the French economy has returned to its baseline condition: “gloom”.
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