The new French government faces an explosive situation. Not political but economic with a State presenting a colossal debt and an out of control deficit.
The tree of debt rises to the sky
It is common to say about financial markets that trees do not reach the sky to raise awareness that a stock cannot rise indefinitely. This maxim does not seem to apply to the state debt which is getting worse every day. The appointment of the new French government sheds new light on the efforts that the country must undertake to return to healthy finances.
France is not the only European state in this situation but the configuration is becoming explosive. With a debt level exceeding 110% of its GDP, France surpasses Spain or Belgium and is getting closer to Italy. Germany is obviously the good student of Europe with 60% debt/GDP. The Maastricht criteria of 60% are a long way off for France…
State debt as a % of GDP
With 3,200 billion EUR of debt, the figures are starting to make your head spin. This amount has more than tripled in 24 years. And unfortunately the pace is accelerating with the Covid crisis in 2020, plunging France into a debt spiral.
French government debt as a % of GDP
The deficit in question
The problem facing the French State is that its current account deficit is abysmal with more than 100 billion for the year 2024. We therefore understand the desire of the Barnier government to reduce the State deficit by some 60 billion.
The deficit is not new since the French state has posted losses since the 1970s.
French deficit (billions of euros)
These amounts today represent 5% of GDP. So each year, France must not only renew its stock of debt but also borrow 5% more. A vicious circle is being set up for public finances.
French deficit (% of GDP)
The high debt of the French State leads to significant debt service, or the repayment of interest. More than EUR 50 billion in interest will be paid to France’s creditors for this year 2024.
Debt service (billions of euros)
Thus, 40% of the French deficit is due solely to the payment of interest on the debt. And unfortunately France does not have a primary surplus, or positive accounts excluding debt service. The State’s primary deficit reaches EUR 80 billion per year.
Primary deficit (billions of euros)
Rising rates
The immediate consequence of this spotlight on the country’s difficulties is the increase in French interest rates. They now reach 3%, the equivalent of Greek or Spanish rates. France is part of Southern Europe if we are to believe the financial markets.
10-year rate in Europe (%)
The gap between German and French interest rates is widening and returning to levels seen only during the 2011 European debt crisis caused by Greece’s difficulties.
10-year yield gap between France and Germany (%)
A vicious circle to break
Last very important point for the French government, the French debt is mainly in foreign hands. Thus the country is at the mercy of external economic interests and cannot avoid major reforms of its governmental apparatus. It is appropriate to give assurances of seriousness to foreign creditors who will not hesitate to sell French debt to buy German debt if the risk becomes too great.
Holding of French State debt as of 12/31/2023
The stage is therefore set for the play that is being performed at the moment:
- A huge deficit;
- a primary deficit (excluding debt interest);
- a colossal debt;
- high rates (level higher than observed for more than 10 years);
- a debt in foreign hands.
The Barnier government must therefore act quickly to restore a revenue surplus, restore confidence in the markets and ultimately be able to reduce debt.
A debt which will have increased by 100 billion this year, implying around 3 billion in additional annual deficit. Next year promises to be crucial since almost 350 billion euros of debt will need to be renewed. 1% more interest here also represents 3 billion additional annual deficit.
Debt maturity (EUR billions)
France and Europe will quickly find themselves faced with a choice. Currency is the key to solving this problem. Either Europe will become stronger with a stronger euro and countries more integrated into a form of equalization and federalization, or the euro will disappear to let countries return to national currencies. In the first case the adjustment variables will be the salary, economic and social variables, as was the case in Greece, in the second the value of the currency which will depreciate. In all cases the principles of good governance must apply so that Europe’s wealth does not disappear after four centuries of light.
“It is at the foot of the wall that we see the wall best” – Coluche.
