La France n'est plus la France

The answer given by Jean-Claude Juncker to those who asked him why the rules of the Stability and Growth Pact did not apply to France must now be reversed: 'La France n'est plus la France'. The country's picture is worrying. The Barnier government resigned, whose attempt to avoid a parliamentary vote to pass the budget law led to a motion of censure passed by the left and right-wing oppositions. The lack of confidence in the government reinforces the perception that President Macron has made serious political mistakes to the point of misrepresenting the outcome of the July 2024 elections. Political fragility, exacerbated by the impeachment of Marine le Pen, and the constitutional impossibility of voting for parliament until twelve months after that date will lead to weak governments and the risk of new censure motions. In the coming months, tensions may therefore increase.

These political-institutional fragilities are aggravated by new negative economic factors. In the last 30 years, unlike the other high-debt countries of the European Union (EU), France has practically never had primary budget surpluses (positive balances net of interest payments). Yet, until recently, the expectation that Germany would not tolerate financial crises in France compressed the burden on French public debt. In addition, the country enjoyed dynamic demographics that boosted its economic growth rates. These factors have sterilised France's budget imbalances for a long time: in the years 2006-10, the ratio of public debt to GDP was close to 74% and still close to the Eurozone (Ea) average; in 2024, the same ratio will stand at 113%, exceeding the Ea average by almost 24 percentage points. The fact is that, according to the European Commission's autumn forecasts, France's average interest expenditure in 2024-26 will be 2.5% of GDP (2.0% in Ea); and the growth of its population will be in line with the low figure for Ea (0.3%).

The described framework explains why financial markets anticipate growing instability: the spread between French and German public debt securities has reached 85 basis points in recent days, which is the highest level since the 2012 crisis and exceeds the corresponding spreads of Portugal, Spain and - sometimes - even Greece. France's fiscal adjustments must above all affect a public expenditure (now almost 58% of GDP) that is often inefficient and exceeds the Ea average by 8 percentage points.

French institutions and society do not appear prepared to handle the new situation. The intermediate bodies protect corporate interests and widespread rent positions instead of internalising general aims and preventing inescapable reductions in public spending from accentuating inequalities. Moreover, unlike other member states, France faced the great international crisis of the 1910s without feeling the threat of a loss of market access in the placement of its public debt; citizens and fragile politicians are therefore unaware of the potential seriousness of the problems. If the combination of the fragmented political framework and France's structural difficulties persists and is compounded by a lack of budgetary adjustment, the risk would be an upward spiral of spreads. Since the legitimacy of calming interventions by the European Central Bank (ECB) is doubtful, an intervention by the European Stability Mechanism (ESM) could even be envisaged, which would be fraught with uncertainties given France's relevance.

The disappearance of the French exception, however, increases the tasks and responsibilities of the EU. It has to apply the new fiscal rules, accepting that corrections of French public deficits should be spread over multi-year, growth-compatible horizons, but demanding that the associated reforms and other interventions be well defined and credible. In addition, the crisis in a crucial country like France makes centralisation in the supply of public goods indispensable. Some large French companies have a potential for innovation that is greater than in Germany and essential for the progress of the area. Utilising this potential (as well as solving Germany's difficulties) cannot be achieved by relaxing the state aid rules that have benefited the two largest EU countries over the past two years. France can no longer afford to indulge in such a drift. Fiscal balances, narrowing technological gaps and the integrity of the single market require the coincidence of national and European interests.