Macron wades into a very French debt crisis

Fiscal ennui. Emmanuel Macron is not having a good spring. French president seemed to wake up a month ago to unpleasant surprise that his country’s budget deficit h ballooned to 5.5% of GDP last year. Some bond investors are alrey shying away from French debt, according to a recent Reuters report. And government officials are worrying about rating agencies Moody’s and Fitch, which will decide on Friday wher or not to downgre France’s sovereign debt from its “stable” outlook.

France, euro zone’s second-largest economy, is unlikely to ask International Monetary Fund or its European partners for of bailout that Greece, Ireland or Portugal received in 2010-2011. country is inste inventing a crisis of its own, forced into an austerity programme that could leave lasting economic and political scars.

Even as some investors got cold feet about French bonds, broer markets remained sanguine. Yields on France’s 10-year bonds, now at 3%, have moved in sync with benchmark German bunds in recent months. At around 55 basis points, spre – difference between return investors demand on French bonds compared to its larger neighbour’s – has not budged much since beginning of year. But that partly reflects Germany’s economic crisis. In same period, Italy’s and Spain’s spres with Germany have narrowed by 40 and 30 basis points, respectively.

Investors know that France is only major euro zone economy whose debt lo, now at 110% of GDP, did not shrink last year as or European governments started to unwind fiscal support doled out during Covid-19 and energy crises. y also know that government’s pledge to bring budget deficit below 3% of GDP by 2027 has been slammed as overly optimistic by both country’s fiscal watchdog and even central bank. It has alrey been revised upwards to 5.1% of GDP this year.

Because of Macron’s long-standing neglect of issue, his government is now scrambling to come up with a rushed deficit-reduction plan for this year and next. Improvisation les to a focus on wrong side of equation – trying to cut spending in a hurry, starting with unemployment benefits.

With France’s public spending now at 56% of GDP – compared to Germany’s 48% – re is a large scope for targeted savings, such as less generous public pensions or a more rational housing policy. Still, France has not massively increased public spending of late. In 10 years from 2014 to 2023, government total expenditure increased by 30%, compared to 58% in Germany, according to IMF data.

Furrmore, last year’s budget surprise was caused by lower tax receipts. This was due to slower growth than expected, as well as Macron’s and his finance minister Bruno Le Maire’s obsession with cutting taxes. Even Banque de France, in its report, urged president to “at least stop lowering” taxes. That should start with closing loopholes, exemptions and rebates created over years to placate different lobbies, which have mostly benefited richest households and largest companies, noted central bank. Macron can no longer run for reelection, so he has nothing to fear from political fallback. same cannot be said of Le Maire, whose presidential ambitions are an open secret.

danger of focusing on spending cuts is both economic and political. Austerity in a downturn will crimp growth and only shrink tax receipts furr. And even after being revised downwards, government’s forecast of an economy expanding by 1% this year seems optimistic – IMF sees growth of just 0.7%. With a minority in parliament, Macron could well have to face new street unrest, and anor spike in popularity of rical parties on both ends of political spectrum. A political crisis after an ill-timed austerity programme to fend off a debt crisis: in that respect at least, France would repeat euro zone’s mistakes of 2010.