France's Deficit Under EU And Market Scrutiny

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For the moment, the ECB isn't saying a word. One statement and the markets could start to seriously lose the confidence that, sooner or... later, they will no longer have in France.

Even Bruno Le Maire, who in recent months had been doing everything possible, sometimes at the expense of the credibility of his role, to appear infinitely reassuring, has for the past week been delivering a speech that seems to better reflect the actual state of French public finances.

According to the Minister for the Economy and Finance, there is a risk that the public deficit will slip to 5.6%, compared with the initial forecast of 5.1%. So the pressure is mounting, or rather, the disorder is spreading, more and more assumed, expressed, admitted... The cause: the point of no return has been reached, and those in charge have ‘resigned’... But all this is just information, at best, arriving too late, like mustard on dessert.

There’s no longer enough money, with over €3,1 trillion in public debt with an average maturity of 8 years, which, some would rightly argue, is difficult to manage. Again, nothing very new. However, at this stage, in the eyes of the markets, France seems to be struggling and managing as best as it can – but it would only take a statement from the European Central Bank indicating potential support for our debt-to-GDP ratio to soar.

If the ECB were to declare, "if necessary, we will be there to support France,” suddenly the tune would shift to a much sharper note.

The spread between the 10-year borrowing costs of France and Germany remains at 70 basis points. Quite simply, this means that the risk premium that investors ask for lending to Paris rather than Berlin, to France rather than Germany, is 0.7 percentage points. Before Emmanuel Macron announced the dissolution of the National Assembly, this spread stood at 50 basis points. The National Rally (RN), the ultra-left or the Macronist centre at the gates of power, in control, whatever, the embarrassment, the real embarrassment, was revealed; France, in addition to facing a bleak economic situation and a thorny budgetary situation, is becoming more and more visibly ungovernable. Even worse, there is a risk that it will not be fully governed in the long term. Between the two rounds of parliamentary elections, the spread even rose to 86 basis points.

Today, while a new government is struggling to be formed, and its potential effectiveness does not seem to be convincing to many, the rating agencies are going to take another look at France's rating in October. Moody's in particular could place Paris on negative outlook, or even go so far as to downgrade its Aa2 rating by one notch, thus aligning itself with the assessments of S&P Global Ratings or Fitch.

In other words, the ECB's monetary easing will do nothing to improve France's bond situation. At the same time as the ECB loosens its monetary policy stance, investors in French government debt can be expected to divide themselves into two categories, and only two: one for investors who are turning away from French debt, and another for more daring investors who are demanding higher yields.

In addition, there are many flaws. France is not Ireland, which doesn't really know what to do with its budget surplus, or even Italy, whose trade surplus would tend to reassure. On the Irish side, the efficient exploitation of the country's assets, coupled with a tax system that is attractive to multinationals, is enough to ensure that the country can avoid any cyclical downturn. Ireland seems to be in the clear for an eternity, or at least an economic eternity; one could say, as long as the major American stocks are prospering.

Today, Ireland, via sovereign wealth funds, holds an impressive amount of American shares in companies such as Amazon, Apple, Microsoft, Pfizer...

Closer to home, the Germans, despite their recession, are doing much better than us. In Germany, public debt hovers around 65% of GDP, a figure almost half that of France.

One of the reasons for this is that domestic trade across the Rhine is not as amorphous as it is here. Back home, the paralysis of French households, the fact that failures of medium-sized businesses are reaching record levels, brings to light a context that, generally speaking, a category of politicians don't like to recognise, and raising taxes can't be effective - on the contrary.

Basically, Bruno Le Maire knows this, and although he, like Gabriel Attal, pledged at the start of the year that there would be no tax increases, the promises are far from being kept. Before the summer, taxation on share buy-backs had been put on paper, and as for a whole range of new taxes, it's as if they were already in force. The government wants new money, it needs it, it's going to find it. And if it doesn't do so by increasing income or corporation tax, it will do so by imposing various taxes. On 1 July 2024, just a few weeks ago, the first stage of an increase in levies for self-employed entrepreneurs from 21% to 26% was introduced, without causing any particular stir.

According to information that has leaked out of the Ministry of the Budget or that has been communicated, VAT could be the one that enables the State to rake in more revenue; potentially, a reduction or abolition of reduced rates for certain sectors or certain categories of products.

On Monday 9 September, Bruno Le Maire defended his desire to return to a France of producers, as opposed to a France of consumers. At this audition, the Minister for the Economy and Finance even went so far as to confide that his ambition was to see a France of ‘peasants’ and ‘workers’ once again, pointing out that this would naturally lead to lower revenues from value-added tax. The implication is clear: past, present and future ‘budget accidents’ are the result of a political line. The reality is quite different. Firstly, because France is in no way on the road back to the peasantry. This is perhaps the most betraying image.

On the corporate side, there is little chance that the economic climate will be conducive to an increase in revenues. Then there was the property market, which was also frozen, with €800 million less in the state coffers in 2023 because of a cold wind on property transactions.

Several parameters are intertwined, making the outcome difficult and confusing. A budget for 2025 must be voted. The new Prime Minister is sending out signals in several areas, some reassuring, others worrying. As is often the case, it's a question of geometry. Michel Barnier has declared himself in favour of "greater tax justice". You don't have to be an insider to understand exactly what that means. Be that as it may, the equation is awkward but basically quite simple.

Meanwhile, at the France’s Finance Ministry, a number of possible savings have already been planned. At this stage, they are limited, such as a reduction in the amounts allocated to the recently created Green Fund.

For the first time, and this had not happened even during the legislative elections, Bruno Le Maire is letting it be known that he will soon no longer be Minister of the Economy and Finance. Overall, the main thrust of his defense, if it is one, at least the main element of his various justifications, is as follows: “Why is France in debt, because I saved the French economy”. Bruno Le Maire expressed himself in these words before the summer, and again in the Senate this week, he is appropriating a form of entitlement to fairly unconventional forms of public spending: “We have protected. I find it difficult to criticize myself today for having spent too much, when you were telling me that I wasn't spending enough”.

The now more than eternal chestnut of Covid crisis spending is almost strident. In the first place, the justification is not accurate, and in many respects, the unconventional monetary policies that enabled France's recent massive indebtedness predate the Covid crisis by at least five years; moreover, the French economy is not doing well, and in no case, in no world and in no state or country, could an economy be saved by the massive and arbitrarily decreed injection of liquidity.

More alarming is the Draghi report, which was submitted to the European Commission on Monday. Alarming in many ways, it presents a deeply negative assessment of the European Union's economic situation: 400 pages, 170 proposals by Mario Draghi to halt what the former ECB President assures us is the EU's unravelling. He states:

"If Europe fails to become more productive, we will be forced to make choices. We will not be able to become a leader in new technologies, a model of climate responsibility and an independent player on the world stage. We will not be able to finance our social model. We will have to scale back some, if not all, of our ambitions. This is an existential challenge."

What we should retain from the proposals is a shift towards a more integrated European Union, in other words towards a federal Europe.

On the budgetary and monetary fronts, Draghi is calling for joint debt issues, and on the defence front, for Ursula Von der Leyen to appoint a European Defence Commissioner who would be responsible for managing a common defence industry budget, largely financed by the European Investment Bank. The ultimatum is clearly set. Without it, Draghi is announcing "a slow agony".

However, the situation is far more complex. What Mario Draghi is presenting here is very much in line with the political trajectory that he himself has been pursuing for two decades as a senior leader and fervent builder of the European Union. Like Ursula Von der Leyen. Strangely, Draghi notes in his report that the economies of the EU countries are in worse shape than before the EU as a political organisation came into being. He talks of a stall in growth, trade in manufactured goods and productive investment since 2002, which is as obvious as it is distressing. And while some argue for more nations and less Europe to counteract this decline, Draghi says the opposite, Europe to the maximum, and announces a need for €800 billion of investment per year under EU supervision, which we understand will not be invested in a very liberal way.