Key Takeaways
- • France's public debt has reached a record $4 trillion, or 119% of GDP, the highest ratio since the immediate aftermath of World War II, according to the primary report.
- • Bond yields have climbed to their highest levels in 24 years, flashing warning signs not seen since the eurozone debt crisis of 2011.
- • Prime Minister Sébastien Lecornu's 2027 budget, which would trim the deficit to 5% of GDP from 5.4%, faces a first critical National Assembly vote on Tuesday.
- • Eurasia Group's Mujtaba Rahman warned that failure to pass the budget could drive debt-servicing costs sharply higher and push France toward IMF assistance.
- • Macquarie's Thierry Wizman argued that France may have to endure a series of political and market shocks before committing to fiscal austerity.
Summary
Nationwide protests over the high cost of living swept France on Saturday, adding to turmoil over public spending and debt ahead of a critical National Assembly vote. Rioting broke out in several cities, with luxury boutiques and supermarkets looted and public buildings defaced and set on fire. The unrest followed mass student demonstrations earlier in the month over run-down classrooms, teacher shortages and school buildings ill-equipped for rising temperatures, which protesters attributed to years of underinvestment in public education.
The fiscal backdrop is severe. France's public debt is now a record $4 trillion, equal to 119% of GDP, and bond yields have reached their highest levels in 24 years. Markets are losing confidence that either the far-right or far-left candidates leading ahead of the spring presidential election will take the steps needed to rein in the deficit. Eurasia Group's Mujtaba Rahman, managing director for Europe, described a combined crisis of liberal democracy, fiscal mismanagement and youth disaffection, writing in a New York Times op-ed that "the fiscal crisis is the most dangerous" and that "France, truly, is on the brink." He noted that more than a quarter of education spending pays pensions for retired teachers. Paul Krugman made a similar link between generous pensions and underfunded education in a Substack post.
The immediate test is the 2027 budget proposed by Prime Minister Sébastien Lecornu, the latest in a series of prime ministers, which would reduce the deficit modestly to 5% of GDP from 5.4%. Rahman warned that if the government fails to pass the budget, the cost of servicing French debt may explode, and France could be forced to seek IMF assistance and to pray for ECB support. The market's concern is more political than economic, he said, given that far-right leader Marine Le Pen has pledged to lower the retirement age to 62 and Jean-Luc Mélenchon proposes having the central bank cancel its holdings of French debt. A June legislative election could also fail to produce a parliamentary majority for the new president. Le Pen could avert immediate crisis by ordering her Assembly allies to abstain on the budget.
Thierry Wizman, global FX and rates strategist at Macquarie Group, said in a note that France would need to pass through a series of convulsions, including a no-confidence vote, a Moody's downgrade, wider protests, a sharper spike in bond spreads, or a Le Pen presidency, before it commits to austerity. He argued the ECB is unlikely to intervene quickly for fear of moral hazard, and that other bailout mechanisms lack sufficient firepower for an economy of France's size.
The fiscal backdrop is severe. France's public debt is now a record $4 trillion, equal to 119% of GDP, and bond yields have reached their highest levels in 24 years. Markets are losing confidence that either the far-right or far-left candidates leading ahead of the spring presidential election will take the steps needed to rein in the deficit. Eurasia Group's Mujtaba Rahman, managing director for Europe, described a combined crisis of liberal democracy, fiscal mismanagement and youth disaffection, writing in a New York Times op-ed that "the fiscal crisis is the most dangerous" and that "France, truly, is on the brink." He noted that more than a quarter of education spending pays pensions for retired teachers. Paul Krugman made a similar link between generous pensions and underfunded education in a Substack post.
The immediate test is the 2027 budget proposed by Prime Minister Sébastien Lecornu, the latest in a series of prime ministers, which would reduce the deficit modestly to 5% of GDP from 5.4%. Rahman warned that if the government fails to pass the budget, the cost of servicing French debt may explode, and France could be forced to seek IMF assistance and to pray for ECB support. The market's concern is more political than economic, he said, given that far-right leader Marine Le Pen has pledged to lower the retirement age to 62 and Jean-Luc Mélenchon proposes having the central bank cancel its holdings of French debt. A June legislative election could also fail to produce a parliamentary majority for the new president. Le Pen could avert immediate crisis by ordering her Assembly allies to abstain on the budget.
Thierry Wizman, global FX and rates strategist at Macquarie Group, said in a note that France would need to pass through a series of convulsions, including a no-confidence vote, a Moody's downgrade, wider protests, a sharper spike in bond spreads, or a Le Pen presidency, before it commits to austerity. He argued the ECB is unlikely to intervene quickly for fear of moral hazard, and that other bailout mechanisms lack sufficient firepower for an economy of France's size.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.