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October 23, 2024 - 7:00am
France’s fiscal problems just keep mounting. The European Commission estimates the country’s public debt, which was 110.6% of GDP in 2023, will rise to 112.4% this year and 113.8% in 2025. Earlier this month, Prime Minister Michel Barnier announced austerity plans to limit the ballooning deficit. But is France actually on the path back to solvency?
The budget deficit for 2024 has turned out to be far bigger than previously disclosed. It looks like the French voting public and numerous institutions, including the European Commission, were misled about the dire state of the country’s finances. This has led to the launch of a parliamentary inquiry that will investigate who knew what, and when — and who chose to sweep bad news under the rug. Legal charges may follow.
Barnier’s government has chosen to deal with France’s budget blowout by raising taxes further. Announcements of spending cuts and a tightening of the public purse strings is dishonest. With 41 ministers on the payroll, Barnier has actually managed to increase the government’s footprint, at least in popular opinion, and raise spending by roughly 2%.
France is already the most taxed economy in the OECD and is fast sliding down on the wrong side of the Laffer curve. It therefore seems likely that, instead of increasing revenues, more tax hikes will reduce investment, trigger a further exodus of capital, and eventually lead to weaker revenues. Barnier also lacks a parliamentary majority, and to stay in Matignon he must rely on the Right-wing Rassemblement National (RN) not voting against him in the National Assembly.
But it is not clear that the RN, a party that draws its support from small businesspeople, shopkeepers and tradesmen, will vote for a tax-hiking budget. And if the RN joins the far-Left in voting against Barnier, then the government falls and the budget does not pass parliament.
At that point, as specified by the constitution, the previous year’s budget — the last one that was voted through — is reinstated by default. But this is where the problem lies: the 2024 budget was already irresponsible, with a deficit that will likely end up being roughly twice the 3% of GDP limit set by the European Union. Clearly, the European Commission would not allow a second blowout year in a row.
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SubscribeIt seems to me that economists are the enemy of our society. They obscure debt information using jargon, rather than explain it. It is in the interest of economists to keep the information murky. Then only they can discuss it with each other.
France owes more than its GDP. Who does it owe money to? Banks and pension funds and private business. Most of the ‘rich’ countries owe a lot of money to themselves. In the UK, pension funds, for example, get a good return for their money by lending money to the government, which wastes it in various trendy schemes – the fashions of the moment – thereby draining the money available and buying votes in the next election and, in so doing, creating the need to borrow more. The whole system stinks to high heaven and has been caused by an evil collaboration between governments and ‘expert’ economists.
As a PhD economist all I can say is ‘fair cop guv’.
The problem is Europe increasingly doesn’t owe the money to itself. The UK and the Euro area’s external liabilities have been rapidly increasing and our net investment position (the difference between assets (stock, bonds, gilts) we own vs assets foreigners own) is now negative.
This has arisen because we run current account deficits, which means collectively we and our governments consume more than we produce. The deficit is filled by asset sales to overseas “investors”: sale of companies, sale of corporate debt, sale of government debt.
Perversely, the more negative the current account deficit, the more money there is chasing corporate and government bonds, which pushes down the cost of debt and encourages even more consumption. This has been the mechanism behind all our Western economic growth (and China’s rise) since the mid 70s but reached its limit when interest rates turned negative.
Thus the likes of China and Saudi (with huge current account surpluses) have ended up owning a lot of our debt and other assets. More recently, as the economic iceberg has become obvious, China has been slowly unwinding its exposure to our debt and in response our cost of borrowing has crept up, our purchasing power has shrunk (inflation) and our economies have been thrown into the doldrums and near recession. And still we have huge current account deficits that need filling.
With fewer overseas investors prepared to fill the gap, the risk is our consumption will be forced lower. What triggers this and how it manifests itself is to be seen. Perhaps our govenrments are already taking action and their radical efforts to increase the cost of domestic energy will make us poorer in the name of a virtuous cause. Or perhaps they haven’t a clue what to do and energy is just another policy mistake on top of many.
With fewer overseas investors prepared to fill the gap, the risk is our consumption will be forced lower.
Thats one possibility-the immediate impact will be increasing Gilt yields which will tighten the tourniquet on Government spending and eventually ,after the Government realises its attempts to increase the tax take are all counterproductive and generate little revenue,public sector cuts will have to be implemented .
A masterly explanation.
Definitely option 2 (incompetence, not planning) for me in your last point.
That is pretty much simply how the global financialized system works. Producer countries buy bonds so they have Western currencies to spend into Western assets. Western countries can run trade deficits while their financial sectors boom. The real economy is left behind.
Many people misunderstand deficits. According to some heterodox economists even mainstream economists misunderstand deficits. The national ‘debt’ in the USA is more than 120% of GDP and Japan has 263%, so both are higher than France’s. According to some economists the world should have ended many times over with these debts but it didn’t.
If it is true that the government borrows from the private sector one would expect the amount of money in the private sector to decrease but the opposite is true. The government sells bonds (gilts in the UK) to cover the deficit. But where does the money to buy these bonds actually come from? After all, if a company makes a profit someone else loses it, in the aggregate nothing happens.
Well, much of it eventually comes from central banks, they just create the money. Another source is private banks: they can also create money when they lend. There is some discussion about whether they need their reserves at all for this. So often when a government does the austerity thing, private debt just increases. And finally the central bank can even simply buy the bonds back with printed money.
A country can of course also make money with trade, but it is obviously impossible for every country in the world to run a trade surplus and, in fact, the US and the UK have one of the biggest trade deficits in the world. Selling bonds to foreign (often producer) countries is an important reason why the globalized system works the way it does. That way those countries have dollars to spend. This is not the same as borrowing in the foreign currency, which is the only real serious debt a government can have.
So in short, deficits are often just money creation.
The problem, of course, is that all this results in a rapidly widening class divide in the debtor countries whose elites are then obliged to start wars in order to deflect from their parasitism.
The problem does not arise because people want something for nothing, it arises because politicians tell them they’re entitled to it. We’ve all got in the habit of assuming we can consume more than we produce and cheap immigration or money printing or Mr Watson’s ‘v. Rich’ will pay.
Well, it works until it doesn’t. That moment has finally come for the French. We’re next.
Macron and Starmer have much in common – they are both given to peevishness when challenged. Macron’s Summer election call was an example, and a disastrous error. Pulling in Barnier as a bridge between extremes is no solution. What is less clear.to me is whether RN will pull the trigger – taking over at this point could destroy a 30 year journey to power. Having recently returned from family visit the mood remains trenchant. The French are not prepared to accept the deficit problem. RN might want to bide their time..
It’s not up to the French any more. The decision will be made in Frankfurt. Global investors aren’t going to bail out Macron so the ECB are faced with a Hobson’s choice: destroy Macron or destroy the EU. VDL didn’t get her European army in time.
Oh well… There but for the grace of Nigel.
We’re on the hook for EU debt until 2026 – part of the agreement. Absolutely hear what you say about Germany/ECB – I have been struck how the Franco/German axis is waning as the.centre of EU gravity. Germany is also in trouble.as energy/geopolitics disupts its mercantilist model. With the rising importance of eastern.European states and angry populations, I wonder if the EU to do list is slightly more nuanced. Of course, specific.to the economics, bond vigilantes are their own threat, but.with Draghi’s report calling for debt consolidation and “more.Europe” does the ECB have its eye.on a different goal?
It’s a double edged sword for RN. If they don’t vote the new budget and win the elections they will step in a horrible situation with the deficit higher than expected and small room for implementing their policy (will depend on ECB to bail them out so have to follow their instructions). If they vote the budget they support austerity and will betray a large antisystemic part of their voters, who might turn to the left as an outlet.
Best solution would be to present their own version of the new budget in advance, and try to create a majority to support this.
Yes, absolutely hear you on this one. Given my reading of the room I wonder if France is heading for a different.solution – VIth republic. In the same.way.i am beginning to seriously wonder if a National Government is in our national stars within 6 years. US elections highly important in the timing of the reset, although not the trajectory.
The only real way out is to ditch the euro. They haven’t got to that stage yet, but they will.
. Clearly, the European Commission would not allow a second blowout year in a row.
Oh please-of course they will-what are they going to do-parachute Draghi in to the Elysee-that should be fun.the French demos are not as compliant as the Greeks or Italians so this will run and run until it can’t.
Yes. It’s not like this is Poland we’re talking about!
Yes
But we all know that the EU will never impose a serious economic sanction on France. France knows it too. The EU knows that France knows that it knows.
All down to Germany eventually getting sick of propping it all up, or losing the will ( or money)to prop it up.
Out of date. It’s Germany that most needs propping up now.
They are still the economic power in the EU, despite their current woes. They still pay around half of the EU budget. Their debt is around 60% of GDP compared to over 110% in France and 100% here in the UK.
Who will prop up Germany?
Given that there are only two sources of power in France, the Elysee and the street, let’s see how this works out.
It’s been a long time coming. But inevitable.
“Eventually, you run out of other people’s money” as I think someone once said.
France could do very well if only they could face up to problems like this and take decisive action. But they’ve been avoiding doing so for at least 30 years.
They need to get to grips with the ECB to get American style credit flexibility, if not making money supply a public utility as China does. The German Kleinbugertum mentality that prevented this before is no longer viable now that their cheap energy and export surpluses were blown up by ‘world events.’
Everyone’s money ultimately arises from someone else’s money, thinking you can cash your chips in and take something away simply sets up a stupid zero sum game with sub optimal results all round, if we’re lucky. If not, black swans fly.
Everyone’s money ultimately arises from someone else’s money
Money is not wealth.
While the 175 New Popular Front deputies on the left ordinarily never vote for anything proposed by the 125 Rassemblement Nationale on the ‘far’ right and vice versa, they have voted together to modify provisions of the ‘centre- right’ budget, reducing taxes and other charges on the general populace while increasing them on super profits and the very wealthy. (They can do this without one supporting the other if the proposition is introduced by a third element.).
If this pattern continues, it could expose the real dividing line in politics between big wealth holders and the little people and even threaten Macron’s hated pension age increase.