Interest rates on French debt surpassed those of Greece last week and reached the highest value compared to Germany since the Eurozone crisis. France is already seen as a new and serious threat to the single currency and everything indicates that Michel Barnier will resort to a constitutional mechanism to be able to approve the State Budget without the approval of the National Assembly, which will open the door to motions of censure. Marine Le Pen’s far-right threatens to collapse the Government. The next chapter in the saga, analysts say, should open the week before Christmas
It is a new “very serious moment” in France and the die is cast. There were months of political turmoil after the heavy defeat of Emmanuel Macron’s Renaissance in the European elections in June, which led the President to bring forward the legislative elections. And after that trip to the polls, in which his party was once again punished and in which no other party won an absolute majority, the country was left to one with Michel Barnier at the helm. And this same Government, which survived a first motion of censure in October, is now once again facing the guillotine.
The new crisis is linked to the sustainability of France’s public debt. On Wednesday, interest rates on Paris’ debt relative to Germany’s rose to the highest level since the Eurozone financial crisis in 2012, leading to a record fall in French shares. The following day, the country’s debt reached a level, remaining after that at values close to those of the Greeks. In other words, bond markets came to consider that the current French debt carried more risks than that of Greece, the country that 15 years ago threatened to collapse the entire Eurozone due to what many considered to be Athens’ fiscal irresponsibility and extravagance.
“Financial markets do not assess the strength of the economy itself, but rather the sustainability of a country’s debt in the medium term, and the current level of French debt is very high, whether in comparison with Europe or in comparison with countries previously in crisis, like Greece and Portugal”, explains Andreas Eisl, economic policy researcher at the Jacques Delors Institute, to CNN.
Barnier government ministers have tried to dispel the analogy, with Antoine Armand, current Minister of Finance, emphasizing a few days ago that “France is not Greece” and that it has “much superior economic and demographic power”. But the comparisons are inescapable – at a time when, as Eisl points out, Greece and Portugal record a “strongly positive” primary balance (interest-free fiscal balance) versus a “strongly negative” one for France.
“While Greece and Portugal are currently heavily deleveraging – Greece is reducing its debt level from 153.1% in 2024 to 142.7% in 2026, Portugal is reducing its debt level from 95.7% to 90.5 % in the same period – French debt levels are expected to increase from 112.7% to 117.1%, even if the current government manages to put its budget plans into practice”, explains the analyst. “And this fiscal situation is exacerbated by a serious crisis in the French political system.”
Le Pen with knife and cheese in hand
Without a parliamentary majority, and when the tax burden in France already represents around 45% of GDP, Barnier is trying to approve a State Budget for 2025 that foresees 40 billion euros in spending cuts and 20 billion euros in tax increases, in attempt to reduce a growing deficit that is expected to reach 6.1% of GDP this year, more than double the 3% limit imposed by Brussels.
In an interview with French broadcaster TF1, Barnier last week asked opposition parties to approve the Budget, arguing that there is “a big storm and very serious turbulence in the financial markets” looming on the horizon. “This is a very serious moment”, said the prime minister, and if the OE is not approved, “there will not only be a political crisis but a financial crisis”. In response, far-right leader Marine Le Pen said she had once again threatened to overthrow the Government.
“Several more populist parties on the left and right of the political spectrum did not consider budgetary consolidation a priority in the 2024 legislative elections”, says Jacques Delors analyst, “and the struggles around the Budget have been characterized by political strategies that aim to maximize its chances in the next elections – probably legislative elections in 2025 and presidential elections in 2027 – instead of reaching a consensus and viable political compromises to resolve France’s budgetary situation”.
The result is “great political uncertainty about future French fiscal policy”, which “has a strong negative effect on market confidence and also harms growth prospects [económico]as companies and individuals are saving instead of investing.”
To approve the Budget, it is increasingly likely that Barnier will have to resort to a constitutional mechanism that allows him to approve laws without the approval of Parliament, a kind of back door provided for in the Constitution that, once opened, subjects the government to motions of censorship in Parliament – and a possibility that the Prime Minister himself assumed in an interview with the regional daily Ouest France.
“When I see what happened in the Assembly [Nacional]it seems difficult to do anything else at the end of the debate, but note that we chose to let the debate happen,” said Barnier, referring to the use of the French Republic. The impasse could reach a critical peak this Monday, in the vote on spending on the welfare state. Alternatively, the motion of censure of the Executive could arrive days before Christmas.
“There are different risks of a negative reaction from financial markets if the Barnier Government collapses”, something that “would probably lead to the bond interest spread increasing even further”, points out Eisl when asked about the risks that the current situation entails. “Much will depend on the proposals of any subsequent Government, but if there is prolonged impasse and a compromise for the 2025 Budget is not found before next summer, I anticipate that these interest rates could move further away from the rest of the Eurozone countries – especially because the simple extension of the Budget from this year to the next will be a negative sign with regard to the sustainability of the country’s debt.”
For Victor Warhem, an analyst at the Center for European Policy, on a political level “everything will depend on Le Pen, who can vote to end the Government”. Her National Regroupment (RN) has not yet confirmed whether it will follow this route or not, with far-right heavyweights such as Sébastien Chenu and Jean-Philippe Tanguy, but with Le Pen for now silent on the route she will follow, in a when she herself is involved in one of the European Parliament, which could prevent her from running for public office in the next five years.
In an attempt to avoid the worst, “Barnier just offered Le Pen what she wanted in terms of limited increases in electricity prices,” says Warhem, which could inject some stability into the French scenario. For now, the expert believes that the RN will maintain its support for the executive. “But we must stay alert, unexpected news in Parliament can change opinion [da líder da extrema-direita] and everything is changing very quickly”, he adds. “Most of the disagreements have to do with the Budget, not with social spending, so I would say that we should pay attention to the days before Christmas.”
If the motion of censure is approved, Macron is constitutionally prevented from dissolving the National Assembly until July, when it will be one year since the last early elections. It is likely that, in this scenario, Barnier will present his resignation to the president, who could reinstate the prime minister to a management government or appoint another figure to head the executive until the next trip to the polls.
And the debt?
If the OE for 2025 is not approved as presented, what awaits the French economy? Andreas Eisl says that, for now, a debt sustainability crisis is not anticipated, at least in the short term – but only “if this or any subsequent Government implements fiscal measures that help reduce the comparatively high primary deficit”.
The economist points to the difference between interest rates on French and German bonds, which have increased in recent months, but recalls that interest rates on French debt have remained stable in nominal terms, largely thanks to the reductions in interest rates decided by the European Central Bank (ECB), which helped to counteract the negative developments.
“If the current Government falls, and with it the current budget plans, much will depend on the Budget that any future Government has to propose and try to implement. The proposal for a completely different Budget could be received in the financial markets with a reaction similar to that which took place in 2022 in the face of the Liz Truss Government’s mini-budget plans in the United Kingdom.
Although the economic policy expert anticipates that French public debt will remain sustainable for now, always under the condition that interest rates on bonds do not increase too much in nominal terms, a way of softening the shock waves caused in markets in the The short term would be to have a “political reaction in terms of fiscal consolidation” and “credible deficit reduction plans” to ensure that these increases do not take place.
In the long term, and asked about feasible alternatives to the large spending cuts that the current Government wants to implement, Andreas Eisl highlights that “a fundamental element for the sustainability of public finances is robust economic growth”, which implies that the French economy improve your growth potential.
“This objective, however, can only be credibly achieved from a medium-term perspective and, given that the French economy is very consumption-oriented and depends in part on state expenditure, it is important not to undertake too drastic a consolidation. , as this would harm growth prospects and, ultimately, also debt sustainability”, says the Jacques Delors analyst.
We return to the political sphere and what awaits France in the coming weeks given the threat of government collapse. “It is a political choice to place more emphasis on spending cuts or tax increases, but as the French State’s quota is already one of the highest in the world, there are limits to consolidating exclusively on the revenue side via OE. For fiscal consolidation to work, it will be essential to cut spending and increase taxes in a way that minimizes the negative impact on economic growth.”
Even if Barnier manages to find a way to pass the current Budget in the form of a “band-aid”, he referred to a few days ago, “a bigger problem remains” – the fact that the excessive spending of the French State is structural. Starting to reduce the Greek deficit more than a decade ago was possible, despite having involved a 30% contraction in GDP. But France “is too big to be saved”, points out the British publication.
“No one wanted to bail out Greece, but doing so was at least relatively affordable. France is more than ten times the size of Greece – and even if it wanted to, not even Germany could afford to bail it out. France risks becoming a much more serious test of the Eurozone than Greece ever was. [E] the crisis in Paris is just beginning.”
