Is France heading towards a Greek debt crisis?

“For the moment, it’s a total exaggeration,” said Éric Heyer, professor of economics at Sciences Po.

France has full access to debt markets. It raised 8.3 billion euros ($14.8 billion) on Monday. The 10-year yield on French public debt stands at 3%. At the height of the Greek debt crisis, the yield on Greek debt soared above 16%. The Greek economy has collapsed, made worse by punitive austerity measures, and Athens has engaged in a bitter fight with Berlin and Brussels over the terms of the euro zone bailout.

During France’s recent political unrest, the gap between its debt and Germany’s debt widened by just 0.3 percentage points, Heyer said.

Nonetheless, investors are reeling from the combination of political paralysis and precarious public finances. The public deficit is expected to reach 6.2% of GDP and Paris is under pressure from the markets and the EU to take corrective measures.

Even though France has failed to balance its budget for five decades, it has reached a point where it can no longer rely on economic growth to keep debt sustainable, the country’s Economic Analysis Council noted earlier This year.

Why is adopting the budget so difficult?

There are two reasons for the budgetary difficulties, believes Antoine Bristielle, director of the opinion observatory at the Jean Jaurès Foundation think tank.

First, the government does not have an absolute majority, which means that any text requires negotiation with the RN or the left-wing bloc of the New Popular Front. Second, the tightening of public finances forces Barnier to make difficult and unpopular choices to achieve his goal of reducing the deficit from 6% to 5% of GDP in 2024.

He proposed a 60 billion euro consolidation plan, which he said would consist mainly of spending cuts, but which in reality relies largely on tax increases. This is unacceptable for the RN and the NFP, who both campaigned this year on promises to increase the purchasing power of the French.

There has also been resistance from the centrist alliance of President Emmanuel Macron and the center-right Republicans, who nominally support the Barnier government.

With little room for maneuver, Barnier said he would likely be forced to resort to a constitutional procedure known as 49.3, which allows the government to pass a law without a parliamentary vote but also exposes it to a motion of censorship.

The left bloc has promised to table such a motion and the RN could now give it the votes necessary to succeed.

This could happen as early as next week, when Parliament votes on a social security financing bill, a supplement to the budget, or later in the month. The budget must be adopted before December 21.

What is Le Pen’s game?

The far-right leader called on Barnier to abandon higher electricity taxes and instead propose deeper spending cuts. She also wants to maintain the indexation of pensions to inflation, reimbursement of drug costs and tax breaks for employers in terms of social security. Last week, she threatened to overthrow the government if she did not win her case.

Barnier sought to put pressure on her by implicitly saying that she would be responsible for the financial crisis that would ensue if the budget failed and the government fell. The RN countered that there would be no financial chaos or American-style government shutdown because the 2024 budget could be renewed through special legislation.

Bristielle said: “The problem (with the RN) is that they both have a strategy of being seen as a respectable party which (…) guarantees a certain stability, while not disappointing their electorate.”

Barnier was the first to give in on Thursday, abandoning the planned increase in electricity taxes, but at a cost of 3.8 billion euros.

This is a major concession to the RN. But some analysts say Le Pen may have decided that her tacit support for Barnier’s increasingly unpopular government was no longer worth the political cost. One factor could be the expected judgment next March in her trial for embezzlement of European funds, for which she could be banned from holding public office, thus ending her presidential ambitions.

“Why should she appear to be a stateswoman when she may not be able to run for president in three years?” Mujtaba Rahman, chief executive of Eurasia Group, wrote in a note to clients, highlighting Le Pen’s shift from conciliatory to populist rhetoric in recent days.

Is France becoming ungovernable?

The difficulties encountered in adopting the budget do not bode well for the long-term survival of the Barnier government or for the future governability of France.

If the government were to fall, Parliament could pass emergency legislation to extend this year’s budget.

If Macron somehow manages to appoint a new government, he could seek to renegotiate the budget, with less ambitious savings measures, Heyer said. However, the possibilities of forming a parliamentary majority are only narrowing.

It is also possible that a “technical government” will be established, with limited decision-making power, until new legislative elections can be held in the northern hemisphere summer, a year after the last one. vote in France, which is as soon as possible according to the agreement. constitution.

Ultimately, a prolonged paralysis is likely to increase pressure on Macron to resign to allow a political restart through a new presidential election.

Bristielle said: “I’m not sure that leaving power is central to his strategy. However, he showed that he could at least surprise us.

© Financial Times