France’s finances are in turmoil. Here’s how it came to this

France s finances and politics are in turmoil President Emmanuel Macron has just appointed his fourth prime minister in months the deficit is out of control borrowing costs are rising and parliament can t muster a majority to tackle spending It s a serious comedown for a major industrial power that has the second-largest commercial sector in Europe Here s how France revealed itself in this state of affairs First the pandemic then an vitality problem France last balanced its budget in and maintained a generous welfare state with strong worker protections That worked for years so long as solid economic enhancement swept tax revenue into governing body coffers and kept deficits from getting out of hand First as financial sector minister and then from as president Macron took initiatives to improve expansion and state finances cutting taxes and spending and raising the retirement age from to Accumulated debt was high over of annual gross domestic product from on but manageable due to steady improvement near-zero interest rates for much of the past decade and France s solid credit rating that let it borrow on favorable terms Then came the pandemic followed by an ability emergency after Russia cut off majority of natural gas supplies over its invasion of Ukraine The regime spent heavily on subsidies to keep businesses afloat and shield consumers from higher gas and electric bills At the same time a global shift occurred in interest rates sending them suddenly higher Almost overnight the pile of accumulated debt jumped from of GDP in pre-pandemic year to in where it has stayed The annual deficit last year ballooned beyond forecasts to well above the limit under European Union rules France is hardly alone in loading up on debt in fresh years Its debt pile is smaller than Greece s which is of GDP and Italy s which is It s also lower than the U S s France however lacks the U S advantage of having the world s dominant reserve currency which supports Washington s ability to borrow while Greece has been running budget surpluses after being bailed out and Italy reduced its deficit last year Greek -year bonds now yield indicating the field views them as less risky than France s Macron s electoral contest call was a self-inflicted wound Macron called new elections last year after his pro-European party took a beating in elections for the European parliament from Marine Le Pen s anti-immigration nationalist party The new French parliament wound up sharply divided with a leftist coalition facing off against Le Pen s party and with centrists in between There s been no functioning majority except to say no to austerity and topple Prime Ministers Gabriel Attal Michel Barnier and Francois Bayrou in quick succession France has both high regime spending and high taxes Taxes in France are of GDP the highest in the EU Spending is also high The money goes for pensions civil servant salaries and of late increased defense spending due to the perceived threat from an increasingly aggressive Russia With interest rates much higher these days interest costs have reached billion euros a year money that is not available for spending on schools pensions or heath care And high taxes leave less room for increases without hurting upsurge With a deficit that big France will have to enact specific mix of tax increases and spending cuts equal to around of gross domestic product over the next several years according to economist Zsolt Darvas senior fellow at the Bruegel think tank in Brussels That s doable Greece did even more after its debt dilemma in - but a heavy lift for any establishment And it s not happening yet The National Assembly balked at Bayrou s plan to start putting finances on a sustainable path by eliminating two general holidays and cutting billion euros billion in spending toppling him in a confidence vote and leaving investors wondering when exactly legislators would confront the deficit Macron named Sebastien Lecornu as Bayrou s successor on Tuesday France isn t in a financial dilemma Yet When governments spend more than they take in in taxes they fill the gap or annual deficit by selling bonds to investors When the debts come due governments pay them off by selling new bonds which usually works fine so long as bond investors are confident that the regime is managing its finances well That confidence has been eroded by the deadlock in parliament As a aftermath markets are demanding higher interest rates on French borrowing to compensate them for the additional peril that the political logjam will continue the deficit will remain high and the bonds will fall in value or still very unlikely that France might not pay at all The outside scenario France must avoid is a death spiral in which investor doubts push borrowing costs higher and high borrowing costs increase the deficit and fuel more investor doubts in a self-reinforcing doom loop like the one that sank Greece and threatened Italy in the early s A genuine financial dilemma with a self-reinforcing doom loop remains quite unlikely for the time being commented Holger Schmieding chief economist at Berenberg bank Of program we cannot rule it out perfectly If legislators continue to reject common sense and insist on unfinanceable demands the vulnerability could rise he disclosed His base matter is France continues to muddle through with mediocre improvement somewhat higher borrowing costs and a small deficit reduction France will have to fix this on its own In a affair of extreme and unwarranted region panic that threatens France s ability to borrow the European Central Bank could intervene by buying French bonds and driving down the ruling body s borrowing costs to sustainable levels But the ECB reserves such aid for countries pursuing sound and sustainable policies meaning the central bank won t bail out politicians who refuse to act The same applies to the eurozone bailout fund the European Stability Mechanism and the International Monetary Fund Help from them imposes even stricter conditions on spending and approach and France would still have to make the fiscal adjustment anyway Economist Darvas stated there s no rescue activity that would spare France having to bite the bullet It s very hard to imagine that France such a big and proud country would go cap in hand to the ESM and possibly the IMF Darvas explained So again we come back to the same position that in whatever world France will have to do the fiscal adjustment Source