France faces long-term pain more than debt crisis
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Pierre Briancon
BERLIN, Nov 28 (Reuters Breakingviews) -Michel Barnier’s political survival has been hostage to far-right leader Marine Le Pen’s whims ever since French President Emmanuel Macron appointed him prime minister in September 2024. But this week the threat that she might add her party’s votes to the left’s in a no confidence vote over the budget spooked bond markets. The real danger for France, however, is not a sharp debt crisis, but the fiscal cost of the current mess.
Investors on Wednesday pushed the spread – the premium they demand to lend to France for 10 years compared to Germany - to a 12-year high. That should not, however, mean a repeat of the kind of euro debt crises of 2010s, complete with bailouts by the International Monetary Fund and the European Union for countries like Greece or Portugal.
France has a large economy and abundant resources. Its government can raise taxes easily, the state owns major assets and is well governed with an efficient and corruption-free bureaucracy. The country's ability to repay its debts is unlikely to be doubted by creditors. But high bond yields would add to the country’s fiscal burden for years and make its much-needed fiscal turnaround more difficult and costly.
The French spread has risen from about 50 to 85 basis points since Macron called a surprise snap election in June, which resulted in a hung parliament and Barnier’s minority government. Investors now demand less to lend to Spain or Portugal. The spread with Italy – Europe’s poster child for bad fiscal policies – has shrunk to just 0.4 percentage points.
Barnier at least has a plan to reduce a budget deficit that will top 6% this year, twice the limit set by EU treaties. His ouster would open a period of instability of at least six months. Macron cannot call new elections until June so he would have to appoint another interim prime minister - who would face the same unruly parliament and deteriorating finances.
France’s interest payments on its debt will increase to more than 60 billion euros next year, up from 36 billion euros in 2020. That’s more than the country’s defence budget. Each percentage-point increase in France’s yields adds 20 billion euros-plus to interest payments after six years, and more than 30 billion euros after 10 years, according to a French think tank. In other words, the rise in yields since June has already added more than 10 billion euros to France’s debt servicing bill in 2034.
France should avoid the fate of Greece or Portugal in the 2010s. But the longer the political crisis, the harsher the austerity needed to turn the country’s finances around.
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CONTEXT NEWS
The premium that bond investors demand to lend to France over 10 years compared to Germany rose to 85 basis points on Nov. 27, its highest level since July 2012, on market worries that Prime Minister Michel Barnier might be ousted after failing to pass the 2025 budget.
Barnier was appointed in September 2024 by President Emmanuel Macron and presented a budget aiming to shrink the country’s fiscal deficit by some 60 billion euros, to 5% of GDP next year, compared to more than 6% in 2024.
Greece and France spreads this year https://reut.rs/3CIvczO
Editing by Francesco Guerrera and Streisand Neto
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