Economic planet | Could France go bankrupt?

After the glorious episode of the Paris Olympic Games, France has reconnected with reality and its economic problems which are only getting worse. Could the country go bankrupt? A surprising question that is beginning to arise.

The country is already under warning from the European Commission, which threatens to impose sanctions for “excessive public deficit”. France is the third most indebted country in the European Union, after Italy and Greece. The country does not meet the criteria set out when creating the single European currency, known as the Maastricht agreements. According to these criteria, euro zone countries are required to maintain their debt level at a maximum of 60% of their gross domestic product and their annual deficit below the 3% threshold.

France was happily heading towards a deficit of 7% of its GDP in 2024 when legislative elections were decreed without warning by President Emmanuel Macron. After the vote and the chaotic period that followed, a new government was formed. He has just inherited a problem which, according to new Prime Minister Michel Barnier, is much worse than what was envisaged before his arrival. This is a familiar tune among several new governments.

The fact remains that France is really in trouble. The country, Europe’s second largest economy after Germany, now finances its heavy debt at an interest rate higher than that of Spain and barely lower than that of Greece.

This means that investors consider it safer to hold Spanish debt than French debt. This also means that the French debt will cost more and that the interest burden will further increase the public deficit.

The plague or cholera

Possible solutions have just been put forward by the new government to find savings of 60 billion euros (around 90 billion Canadian dollars) within a year. That’s a lot of money.

Two thirds of these savings must come from reductions in public spending and the rest from increasing state revenues, in particular through an increase in taxes on the better off.

It’s a bit like having the choice between the plague and cholera. As is the case in several other countries, the French population is irritated by the constant deterioration of public services, particularly in hospitals and schools. The plan to reduce the number of civil servants and teachers and to reduce pensions and public aid for insulation and electrification in particular will not go down easily in a country where protest is endemic.

Likewise, the government’s intention to raise 20 billion euros in new revenue by increasing taxes on the richest households and businesses risks hitting a wall. France is already the country with the highest tax burden in the world.

The weight of taxes represents 46.1% of French gross domestic product, the highest level among the countries of the Organization for Economic Cooperation and Development.¹.

In Canada, this proportion is 39.2% while in the United States, the weight of taxes represents 27.7% of GDP.

The slimming treatment required in public spending also risks weakening already anemic economic growth and ruining these efforts.

All the restrictive measures would make it possible to reduce the deficit to 5% of GDP in 2025, an objective which has a high risk of not being achieved, has already ruled the High Council of Public Finances, an organization independent of the government which has examined the proposals.

Could France go bankrupt? No, because French debt continues to find buyers on the financial markets and the European Central Bank would surely come to the country’s aid in the event of a debt crisis. However, the next few years promise to be difficult.

1. Read an article published in The Point