For the first time ever, France’s borrowing costs have risen above those of Greece. As of today, the bond markets have decided that French debt is a riskier bet than Greece, the country that 15 years ago almost crashed the entire euro-zone with its fiscal extravagance and irresponsibility. True, to some degree that reflects an improvement in Greece’s position, as well as the decline of France’s. Yet the harsh reality is this: France is in a sorry state and president Emmanuel Macron will struggle to patch things up.
The bond markets have decided that French debt is a riskier bet than Greece
This moment of crisis was bound to happen eventually. Ever since Macron plunged France’s political system into chaos in the spring with snap elections that went badly wrong for his governing party, the bond markets have been demanding higher and higher prices to hold French debt. As Liz Truss discovered during her brief premiership, the bond markets don’t like uncertainty.
French ministers are doing their best to brush away comparisons with Greece. Finance minister Antoine Armand said: “France is not Greece. France has…far superior economic and demographic power which means it is not Greece”.
His words are hardly reassuring. France is running a deficit of 6 per cent of GDP, even with no immediate crisis to address, and with the economy stagnating that figure may well turn out to be even higher. The state already collects an eye-watering 45 per cent of GDP in tax, among the highest in the OECD. This makes it hard for Macron’s government to squeeze any more money out of the system.
Macron isn’t entirely to blame for this sorry situation. French politics is dominated by parties from the left and the right that only want to increase spending even more. Against this toxic backdrop, France was always going to overtake Greece eventually. If prime minister Michel Barnier’s caretaker government can’t pass a Budget over the next few days, and it may well not, bond prices could start to spiral out of control.
Even if Barnier does manage to find a sticking plaster, a greater problem remains: France’s over-spending is structural. Greece’s debts weren’t helped by the wildly expensive 2004 Olympics, and lots of flashy infrastructure projects (with some corruption mixed in). It was relatively easy to cut back on that, and start to bring the deficit down, even though it involved a 30 per cent contraction in GDP to get there.
France, by contrast, has huge and expensive welfare commitments that are hard to trim. The country is a mature, high-cost economy; Greece in 2012 was more like an emerging market, with lots of scope to catch up with richer countries. As a result, it is going to be very hard to accelerate French growth in any significant way.
Most seriously, France is far too big to bail out. Nobody wanted to rescue Greece, but doing so was at least relatively affordable. France is more than ten times its size. Not even Germany can afford to come to the rescue, even if it wanted to. France risks turning into a far more serious test of the euro-zone than Greece ever was. The crisis in Paris is just starting.