By France’s ongoing financial troubles are causing unease among its European Union partners and financial markets, as concerns mount that the vulnerability of its minority government could hinder efforts to stabilize public finances.
This, in turn, poses a potential risk to the EU’s newly adopted fiscal guidelines.
On Saturday, a new government led by Prime Minister Michel Barnier was unveiled.
However, the administration will need to rely on the support of the far-right National Rally for critical votes, such as those related to the 2025 budget and a seven-year debt reduction plan mandated by the EU.
Complicating matters, both the far-right and far-left, which hold nearly one-third of parliamentary seats each, are firmly against implementing spending cuts—even as France’s budget deficit is expected to hit approximately 6% of GDP this year, doubling the EU’s prescribed limit.
“The political instability of the coalition is undeniable,” Reuters reported, quoting one eurozone official, who, like others, requested anonymity due to the sensitivity of the situation.
I would not say that expectations are overly optimistic.
The European Commission projects France’s public debt, already at 110.6% of GDP in 2023, will rise to 112.4% this year and 113.8% in 2025 unless decisive action is taken.
EU rules call for an annual reduction of 1 percentage point of GDP.
A second euro official told Reuters:
This is a real dilemma, obviously. Putting together a debt-cutting plan that is both compliant with the new framework and politically acceptable in the hostile French parliament is going to be extraordinarily difficult.
“In the end, one needs to hope that there is sufficient realization in Paris that the cost of failure could be very high, and that will encourage some parties to at least temporarily lend their support to the government,” the official added.
French bond yields surge amid market anxiety
Market jitters over France’s public finances are already impacting the nation’s borrowing costs.
The yield on France’s 10-year government bonds briefly surpassed that of Spain’s for the first time on Tuesday since the 2008 financial crisis, reflecting rising investor concern.
Prime Minister Barnier is set to present the 2025 budget proposal to the French parliament and the European Commission by mid-October.
This will be followed by a seven-year plan addressing reforms, investments, and debt reduction, anticipated by the end of October.
Although some EU officials believe market pressures might drive French lawmakers to take difficult fiscal decisions, there are also worries that a weak debt plan could undermine the credibility of the EU’s freshly established fiscal framework, introduced in April.
Can France avoid special treatment this time?
A senior eurozone official noted that France has historically enjoyed leniency from the EU regarding fiscal compliance, but this time may be different.
“I don’t think France will be able to sidestep the rules so easily this time, as failure would severely undermine the new fiscal framework,” the official said.
France has often breached EU rules that cap budget deficits at 3% of GDP and has not achieved a budget surplus since 1974, predating President Emmanuel Macron’s birth by three years.
In the past, the European Commission offered France a degree of leniency, famously justified by former Commission President Jean-Claude Juncker, who remarked, “France is France.”
While the updated fiscal framework allows countries to tailor their debt reduction strategies in consultation with the European Commission, it also aims to demonstrate that EU governments are serious about tackling post-pandemic debt levels and the financial strain from the energy crisis.
“I guess the French plan will be a test case,” Reuters reported, quoting another eurozone official.
We’ll have to see how much room for maneuver France will be given. Even if the initial plan looks stringent, there may be flexibility down the road when the Commission reviews its progress over the years.
The outcome of France’s debt management strategy will be closely monitored, as it will not only impact its own economy but also serve as a litmus test for the efficacy and enforcement of the EU’s broader fiscal policies.
The post France’s debt struggles spark concerns in EU and markets appeared first on Invezz
