On Tuesday, France’s National Assembly is facing a major austerity vote, due to its debt crisis. According to a Fortune magazine article by Jason Ma, “France, truly, is on the brink and just days away from a make-or-break moment in its debt crisis, (an) analyst warns, as protests turn into riots.” France’s looming debt has sent bond yields to the highest levels in 24 years. France’s public debt is now a record $4 trillion, or 119% of GDP—the highest ratio since the immediate aftermath of World War II. The 2027 budget proposal by the latest Prime Minister, Sébastien Lecornu, is centered around bringing the deficit down from 5.4% of GDP to 5.0%—and it faces a first critical vote in the National Assembly on Tuesday.
Ma explained that, “given that far-right and far-left candidates are in the lead to become France’s next president in the spring, markets are losing confidence that either side will take the painful steps necessary to rein in the deficit.” The managing director for Eurasia Group’s Europe desk, Mujtaba Rahman, is cited on the priorities for the market: “’France is suffering from a crisis of liberal democracy, a crisis of fiscal mismanagement, and a crisis of youth disaffection. But the fiscal crisis is the most dangerous, underlying many of the country’s woes and threatening to bring it to ruin,’ he wrote in a New York Times op-ed on Thursday. ‘France, truly, is on the brink.’”
In the op-ed, Rahman singled out for blame the pensions of retired teachers—as if taking back part of their pensions would solve the problem. American Democratic liberal economist Paul Krugman echoed the same, posting on his Substack that the French government’s pension plan for teachers means that the government is “rewarding” the older French, at the expense of everyone else.
Rahman’s scenario for France followed: “If [Lecornu’s] government fails to pass the budget, the cost of servicing French debt may explode. France could be forced to seek assistance from the International Monetary Fund and to pray for it from the European Central Bank—a humiliation for the world’s seventh-biggest economy.” France might avoid an imminent catastrophe this coming week, if Le Pen orders her allies in the Assembly to abstain on the budget, allowing it to pass. “That may avert, for now, the kind of meltdown suffered by Greece after the financial crash. But France is no longer in control of its destiny.”
Ma presents the bigger picture, as argued by Thierry Wizman, the strategist for global FX and rates at Macquarie Group. On Oct. 13, Wizman explained, as Ma put it, “that a series of convulsions would have to occur for France to get its act together and appease the bond market. That could include a no-confidence vote that leaves France with no governance from the Assembly, a Moody’s credit downgrade, a widening of street protests and violence, a sharper and contagious spike in France’s bond yield spread, and the election of Le Pen as president. The European Central Bank also wouldn’t come to the rescue quickly for fear of encouraging ‘moral hazard,’ and other bailout mechanisms lack the firepower for an economy as large as France’s.” Then, he quoted Wizman directly: “Either way, it would seem that one would have to go through the valley before getting to the other side of the fiscal responsibility gap. And only after all that transformational pain of the next few months may France find its spine and commit to austerity.”
