X Close

France’s credit rating downgrade kills Macron’s credibility

June 3, 2024 - 7:00am

Last week S&P Global downgraded France’s credit rating from AA to AA-, hammering the final nail in the coffin of the Macron presidency. Emmanuel Macron won as a competent technocrat and a former investment banker who would manage France’s economy with ease. Now, nearly halfway through his presidential term, France appears to be slipping into bankruptcy.

France’s deficit was 5.5% of GDP in 2023, and it is expected to remain high at 4.9% of GDP in 2024 and 2025. The country currently has the fourth largest government deficit in Europe, and at around 110% of GDP, the third largest debt-to-GDP ratio. The Maastricht criteria rules that govern membership of the single currency set an overall debt limit of 60% of GDP and a deficit limit of 3%. Now, France has more than double the allowed debt load and almost double the deficit.

Macron has found himself caught in the same bind as many other centrists in Europe: they state publicly that they want to provide economic stewardship, but they keep getting caught up in economically destructive policies. The two main causes of France’s current woes are the costs imposed, first by the lockdowns, then by the high energy prices driven by the sanctions and counter-sanctions associated with the war in Ukraine.

Recently, the French president floated the idea of sending troops to Ukraine. This would presumably move France very close to a state of war with Russia. But with its soaring deficit and debt load, how would France afford such a war? It obviously could not. This is the problem with so many “sensible” centrist politicians today: their policies make absolutely no economic sense, but they are driven to commit to them regardless because they feel the need to identify with other centrists on emotive issues like the war.

Last year, the Macron government pushed through pension reforms in the face of protests and deeply entrenched opposition in the public. The reforms raised the eligible pension age from 62 to 64. Yet clearly, looking at the government deficit numbers, these reforms have made little financial difference. Again, this is because in comparison to the economically destructive policies these politicians feel compelled to adopt, policies like the French pension reform are merely a drop in the bucket.

In fact, France is now in a position where a recession could easily bankrupt the country. Consider that in 2008, the French government deficit was 3.5% of GDP. As the country fell into recession in 2009, the deficit rose to 7.4% of GDP. If we saw a similar increase due to a recession this year or next, France would have a deficit of nearly 10% of GDP — by far the largest the country would have had since WWII.

It is not surprising that Macron is deeply unpopular in France. At the start of his presidential term in 2022, the French president was polling above 40%. This has now fallen to 30%. Liberal centrists like Macron must accept the fact that there are serious trade-offs when it comes to their desires to get involved in global conflict. A European politician today cannot support deeper involvement in global conflict and pursue an agenda of economic growth and stewardship. Likewise, they cannot remain electorally popular and remain in the good graces of their fellow war enthusiasts. These politicians need to decide who their constituency actually is.


Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics

philippilk

Join the discussion


Join like minded readers that support our journalism by becoming a paid subscriber


To join the discussion in the comments, become a paid subscriber.

Join like minded readers that support our journalism, read unlimited articles and enjoy other subscriber-only benefits.

Subscribe
Subscribe
Notify of
guest

22 Comments
Most Voted
Newest Oldest
Inline Feedbacks
View all comments
Dennis Roberts
Dennis Roberts
22 days ago

“France’s deficit was 5.5% of GDP in 2023, and it is expected to remain high at 4.9% of GDP in 2024 and 2025. The country currently has the fourth largest government deficit in Europe, and at around 140% of GDP, the third largest debt-to-GDP ratio”

Didn’t realise it had got quite that bad in France – heading the way of Italy.

Rocky Martiano
Rocky Martiano
20 days ago
Reply to  Dennis Roberts

The ludicrous pretence that the Maastricht criteria imposed any limits on government spending was shattered within the first couple of years after the treaty was signed. Virtually every member country broke them then and have carried on breaking them ever since.

Aidan Twomey
Aidan Twomey
22 days ago

The points about Macron are well made, but it is not Macron that is being downgraded, it is the French people. They are the problem here, not Macron. They are the ones running up a 5.5% deficit, it’s being spent on them not on golden telephones for Macron’s palace. Modern liberal democracies have entered a phase where people look to the state for protection and even meaning, and demand spending on everything from lockdowns to pensions. Well, it will end badly as the state is not worthy of this kind of trust.
The one thing Macron has correct is the gradual realisation that Russia must be tackled militarily. It is not the job of a nation to pamper its citizens, it is the job of a nation to push back against empires that wish to compromise its sovereignty.

David Giles
David Giles
22 days ago
Reply to  Aidan Twomey

Entirely agree. We went out all and pulverised any politician who dares even to hunt we can’t have it.
We still refuse to accept there was ever any chat to lockdown and will refuse to accept it until our generation is in the grave. A future generation will then turn us into a morality tale, just as we now laugh at the appeasers of the 1930s.

Emmanuel MARTIN
Emmanuel MARTIN
22 days ago
Reply to  Aidan Twomey

As a Frenchmen, let me tell you that the people welfare is squandered on are not French, or not workers (sometimes neither)
Macron is kinda copying the Sunak fantastic strategy of pandering to boomer retirees, his only remaining constituency. Last year we had 5% pension increase (and FU for every other French)
France needs frexit and a unilateral repeal of boomer debt.

Michael Cazaly
Michael Cazaly
22 days ago

Boomer retirees? You mean the people who have paid high taxes all of their lives, including death taxes when their parents died, were discouraged from saving because it wasn’t worthwhile due to inflation (among much else)… those people?
Of course they expect the State to look after them; mainly they wanted to look after themselves but that option wasn’t on offer…
The State provision is a Ponzi scheme and having been forced to pay in, they now want to be paid out.
There is, of course, an alternative…the State could pay back to those people the money they paid in, adjusted for inflation and with relevant interest.

Aidan Twomey
Aidan Twomey
22 days ago
Reply to  Michael Cazaly

You haven’t paid high taxes all your lives. In 1994, tax was 31% of GDP. In 2010 it was 36%. Now it is 40%, and the increase is explained to a large degree by state pension spending, which has gone up massively under the triple lock. You boomers paid very little into the system, yet think you are entitled to be treated like high rollers. You are a classic example of the people who take more out of the system than you pay in.

Paul T
Paul T
21 days ago
Reply to  Aidan Twomey

This isn’t correct. After 1994 workers demanded more and more and more rights and benefits and holidays whilst forgetting the gigantic interest rates that accompanied much baby boomer income and expenditure. Like you they are an integral part of the “someone else, richer [than me] should pay” generations. Those generations – those after the baby boomers – have not rescinded those rights and benefits so it is quite wrong to claim that “a big boy did it and ran away” in this special-little-victim diatribe of yours. You have yet to meet the costs and will inherit more than any generation in history – with falling birth rates. Start working, pick up the slack and take your responsibility to innovate and deal with the world as it is, seriously, instead of endlessly carping how its not fair before shi**ing yourself and rolling around in it whilst live-streaming it.

Aidan Twomey
Aidan Twomey
21 days ago
Reply to  Paul T

Do you feel better after that foul mouthed diatribe? I notice that you couldn’t quite put your finger on what I said that was not correct. In 1994, when boomers were at the height of their earnings, the Bank of England base rate was 5.13%, now it is 5.25%, so I hardly think you suffered gigantic interest rates. I would rather think that you suffered unfairly tiny interest rates, but logic seems to have escaped you in a quite embarrassing way.

But it is typical, in my experience, that if anyone says the triple lock is excessive spending for a benefit, boomers start swearing and frothing and just being deeply unpleasant.

Paul T
Paul T
20 days ago
Reply to  Aidan Twomey

Bore off trogg.

Aidan Twomey
Aidan Twomey
20 days ago
Reply to  Paul T

I see the standard of education has really gone up since your day.

Dennis Roberts
Dennis Roberts
21 days ago
Reply to  Paul T

The current generation of retirees paid for the smaller, shorter lived generations before them. The current generations of workers will pay the biggest, longest-lived generation.

In general terms the current pensioners will take out more than they put in – I think it’s estimated at about 10%. I’m not sure if that refers to pensions only or includes healthcare etc.

P Branagan
P Branagan
21 days ago
Reply to  Aidan Twomey

France like all other European states are not sovereign in any meaningful way. They’ve all ended up as loathsome lickspittles of the perpetual warmongering deep state of the USA.
They deserve everything they’re going to get.

Mike Downing
Mike Downing
22 days ago

“S&P Global downgraded France’s credit rating”

This is the same S&P that claimed those worthless ‘packages’ of mortgages pre-2008 were in fact AAA rated and as safe as houses (how they laughed as they creamed off those generous commission payments).

Nevertheless I basically agree; we (Western governments) are all living beyond our means in la la land and the chickens will shortly come home to roost.

With ‘money’ magically generated at the click of a button, our economies are more like vast Ponzi schemes and yet we appear to still be able to walk on water.

Anthony Roe
Anthony Roe
22 days ago

Paris is now an African city and will soon resemble Lagos or Cairo with a few select tourist destinations heavily guarded (for the Chinese).

RA Znayder
RA Znayder
22 days ago

The criticism of Marcon’s policies seem reasonable. However, the neoclassical understanding of deficits have been largely wrong for about 50 years now. If the deficits are in the currency of the state, there is really not that much to worry about except inflation. Now, of course the euro is not under full control of France. Rather, the ECB dictates the monetary policy. So just as we saw with Greece they can push for austerity. But then we should also ask if it was austerity that got Greece back on its feet? Well, not exactly. Things started running again when central banks started throwing with money. To be clear, of course states can and do use deficits for questionable things, but the 60%/3% rule is rather arbitrary. Moreover, the paradigm that the state borrows from the private sector is not really accurate if one includes money creation.
Of course fiscally conservative commenters beg to differ. However, what they often don’t tell us is that – while deficits were being restricted in 2008 – central banks pushed trillions into the economy through the backdoor using quantitative easing. In 2020 this also happened on a large scale. So while spending on the real economy and welfare states is always ‘too expensive’, it is no problem to flood the banks with billions of free liquidity whenever they need it using an accounting trick. And this did, in fact, create monetary inflation. However, for technical reasons mostly in assets, which incidentally is a big reason why we have a housing bubble. In fact, just before 2008 many economists told us the economy was doing fine, deficits were decreasing. Well, we all know how that ended. The way we can understand this is that while economists obsess about public debt many ignore private debt. Yet, it is private- debt and borrowing that underlies many economic crises.  
To be clear, states cannot just spend indefinitely and also debt in foreign currencies is problematic. However, people can at least ask themselves why normal people have to deal with austerity while big capital keeps getting free presents.  

Aidan Twomey
Aidan Twomey
22 days ago
Reply to  RA Znayder

In what way do ordinary people have to deal with austerity? Both French and UK governments spend about 50% of GDP, which is in no way austere. Furthermore, these deficits are being spent on ordinary people. Many, many ordinary people get way more out of the state, including unfunded pensions, that they contribute. Why do you think “big capital” is the recipient of largesse and not ordinary people?

RA Znayder
RA Znayder
21 days ago
Reply to  Aidan Twomey

It is not controversial that welfare states have been reduced in the West, although France is not the best example. They famously spend quite a bit on the welfare state. UK is a different story.
Nevertheless, if we look, for example, at the share of the economy going to wages we see a sharp decline in many Western countries in the past 50 years. A larger and larger share of the total wealth pie goes to capital instead of the real economy, and thus the biggest fish. After the QE rounds this became even more extreme. However, if we look only at deficits and fiscal policy we cannot immediately explain this. It gives us a distorted image because we have, among other things, these exotic monetary policies like QE. 
Inequality has been surging and government (central bank) policy played a big role. Another overlooked reason why public spending can be high is because privatization did not deliver on its promises. Selling assets gave governments a financial boost but, after a while, in many cases the state pays much more for private services in the public sector. Sometimes because of the lack of competition, sometimes because of cronyism, sometimes a combination. I think we all have experiences with this in healthcare, for example.

RA Znayder
RA Znayder
21 days ago
Reply to  RA Znayder

Sorry, I had to delete this message because I accidentally replied to myself. See my reply below.

Michael Cazaly
Michael Cazaly
22 days ago

Why does anyone take notice of the likes of S&P?
Like all the “experts” (BoE, OBR, follow the science…) they were totally wrong when it mattered ie in valuing securities backed by sub prime mortgages.
You may as well ask your dog…

Michael Marron
Michael Marron
22 days ago

Can anyone explain to me why the author puts government debt to gdp at 140 but trading economics et all put it at 110?
Personally, I believe the 140.

Jim Haggerty
Jim Haggerty
21 days ago

I also wonder where the monies for the energy transition and increased defense spending will come from as interest rates will be higher than they been in the recent past and the debt burdens of western govts ( already high) will continue to grow. At some point, the debt markets will push back on the high Debt to GDP ratios and those financing costs will only get more expensive