With the return on the rare reforms obtained by Emmanuel Macron (such as raising the retirement age), and the soaring public deficits, the June 30 elections will highlight the problems of an economy that has long been on an unsustainable path.
Is protectionism a solution?
Globalization and free trade are not popular in France. Paris has never hesitated to defend certain key sectors, even though some champions have benefited from world trade. France's competitiveness has decreased gradually due to the lack of strategic thinking. The economy is suffering, and a decade of low growth and stagnation in real wages has ended up destroying the French's patience. In an attempt to cope, the country is turning more towards protectionism, demonizing foreign products in the meantime, and giving in to easy speeches and spending everything.
France spends a lot, but not in a good way
French politicians have been known to boast about their country's economic performance, which is much better than that of neighboring Germany, in recent years. Logic in a way since, more dependent on its industry, Germany was more impacted by the rise in gas prices due to war in Ukraine, as well as by European regulations that penalized the automobile or more energy-intensive sectors. However, the comparison is not limited to that.
Between 2020 and 2023, France experienced an average growth rate of 0.6%, while Germany experienced an average growth rate of 0.2%. Over that same period, France's budget deficit averaged 6.5%, which was twice as much as Germany's 3.2%.
The growth gap is ultimately limited, which has led France to spend a lot, and not always in the best way. Public spending has a multiplier effect on the economy in normal conditions. In theory, a 3% increase in public spending would result in a larger boost in growth. This is clearly not the case in France, where the multiplier seems to be negative. It's no secret that a German state that had let its budget deficits slip further would have had a much better performance.
But in the meantime, France is mortgaging its future. In 2023, the public debt of that country will reach 110% of GDP. Germany's GDP is only 63.6%. As a result, France has a greater exposure to financing conditions on the bond markets, particularly to rising credit prices. At this point, the entire French yield curve is nearing or exceeding 3%. It's worth noting that some of the debt was financed a few years ago when interest rates were zero or even negative. The current rates have not yet been passed on to the entire French debt. Eventually, the debt will require financing or re-financing. And with a debt of about 110% of GDP and interest rates of more than 3% on average, the interest on the debt will tend towards a weight of about 3.5% of GDP (and about 7% of French tax revenue). Germany is able to finance itself more effectively, and its debt levels are lower.
In accordance with the same logic, its debt charges will account for about 1.5% of GDP and 3% of tax revenue in the future. The two biggest economies in the eurozone will have a significant amount of room to maneuver in the future.
Fragile debt market
The fact that Paris is much more enthusiastic than Berlin about lowering the ECB's key rates is logical given the figures. That would mean lower credit rates, at least in the short term. This is without counting on the fact that if the bond markets actually follow the policy rates for the shortest maturities, they can diverge – sometimes violently – on the longer maturities. In many emerging markets, this is a common occurrence. The ECB’s rate cut may therefore not have the desired effect.
It's true that there is already a lot of negative news about French debt in the markets. Investors are likely to severely punish any slippage in the public accounts that exceeds planned limits. The S&P rating agency - which downgraded France’s debt at the beginning of the month - already points to a deficit of 5.2% of GDP in 2024, 4.3% on average over 2025/2026, and still above 3% of GDP in 2027. Both Mélenchon's left and Le Pen's right advocate for increases in social spending, while both advocate for reducing the tax burden and lowering the retirement age.
This would further dampen public accounts with over $100 billion in additional spending for the left-wing program and at least several dozen for the right-wing program. The deficit would be exacerbated by that. Turbulence is predicted in this market, and it is probable that it will quickly become a problem for the French Treasury. Since 1974, France has not been able to present a balanced budget, which means it may have to adjust to living within its means, which will be inevitably painful.
Towards a European debt?
For a long time now, Paris has been fantasizing about European debt issues, a mutualisation of debt (and risks) that would allow France to get its hands on the savings of more cautious countries, Germany in the lead.
A French debt crisis may be seen by some as a unique opportunity to push through such an agenda. President Macron's commitments to control French public spending when he came to power have made the timid progress on this front possible. Since then, there has been little progress.
At a time when sovereigns movements are gaining popularity everywhere (and especially in Germany, the Netherlands, Belgium or Austria), it is hard to see how other European partners would trust Paris and this, whatever party is in power after the next election.
France has been ruled by sight for a while now, with no real long-term vision. Successive governments act in the face of crises, not hesitated to pour public money into the sectors that cry the loudest, in an eternal quest for social peace. The absence of dynamics and strategy in a country whose global stature is on the decline makes such a quest illusory to the point that, at this stage, the French are tempted to give a chance to the extremes, hoping to achieve a better result.
However, the country is deeply divided and more inclined to return to the achievements of yesterday than to prepare for the future with serious reforms. This leads to the belief that they will be disappointed once again.
We are not buying the French market as a whole due to these bleak prospects.