An explosion. Spain now borrows at a more favorable rate than France. This has already been the case for some time for Portugal. Among our neighbors, we finally seem to be taking stock of the decline in public finances. Michel Barnier, Prime Minister, called for an effort of 60 billion euros, just for next year. In Belgium, waking up is also painful. With one notable difference: our “small” economy probably cannot afford the largesse of our neighbor.
For several days now, public finances have (finally) agitated the French political world. The fault lies in an uncontrolled budgetary slippage, which would push the deficit to more than 6% of GDP in 2025 – last in the European class – if no action is taken. The worst part is that this increased anticipation came out of nowhere. The “whatever it costs” of the covid period or the energy crisis is not in question here. To the point that the French press is wondering if this slip-up was not deliberately concealed and if it did not provoke the surprise dissolution of Emmanuel Macron last June.
Michel Barnier, Prime Minister, had no choice but to whistle the end of recess. Last week before the Assembly, the old sea dog of French politics called a spade a cha: if France does not put its public finances in order, it will face a “colossal” debt which “ will place the country on the edge of the precipice”. At the end of June, this debt amounted to 3,228 billion euros, 112% of GDP. Debt charges already represent the second largest expenditure item for the French state, behind education.
The scale of the effort is now known. Michel Barnier wants to return to the 3% deficit in two stages: 60 billion euros to reduce the deficit to 5%, in 2025, before reaching the European objective of 3%, in 2029. To do this, the one who has little left to lose politically is aiming for one third new taxes and two thirds spending cuts. Ideas for the first third have proliferated in recent days. For the remaining two thirds, the Prime Minister was much more vague.
Borrowing rate
This precarious situation of public finances has weighed down market sentiment regarding French debt. Since the end of September, Spain can regularly refinance itself at a more attractive rate than France. The reference rate, the yield on the 10-year bond, is, at the time of writing, 2.96% for France compared to 2.93% for Spain. This is a first since 2006, two years before the financial crisis which plunged Spain, Portugal, Italy and especially Greece into the sovereign debt crisis.
Portugal’s 10-year borrowing rate, at 2.73%, has already been below that of France for several months. But on September 26, one more thunderbolt, the yield on Greece’s five-year bond fell below that of France. Yes, Greece, a state in a near-bankruptcy situation, around fifteen years ago.
This deterioration of the French debt has increased since the dissolution enacted by Emmanuel Macron. THE spread with the German 10-year rate at the time being 0.5%, it is now 0.8%, while the German economy is at its worst. But according to Eric Dor, director of economic studies at the IESEG School of Management in Paris and Lille, the origin of the problem predates the political earthquake and is not really a surprise. “Because for some time, we have had the conjunction of several debt sustainability factors which are deteriorating in France, while they are improving significantly in Spain and Portugal.”
The yield on Greece’s five-year bond has fallen below that of France.
Net state debt
Three factors determine debt sustainability. First, the height of this debt and the deficit. However, we note that since 2023, the French deficit is deeper than the Spanish deficit. Portugal even managed to create a surplus of 1.2% of its GDP that year. “And when we look at the prospects for 2024 and the following years, we see that this situation will continue,” adds Eric Dor. It is therefore established over time.” And the same observation applies to the level of French public debt which is now higher than that of its Iberian neighbors: “Portugal has even already fallen below 100%”, points out the expert.
Then there is the economic situation. The stronger the growth, the easier the debt is to carry. Quite simply because the debt and deficit are measured as a proportion of GDP. The more growth increases, the more the denominator increases and the lower the ratios will be. And who says more growth also means more tax revenue, via VAT, IPP and Isoc.
“But what do we see? That since 2023, Spain and Portugal have had much better growth than France,” notes the economist. With 2.5% growth in 2023, Spain is even at the level of growth in the United States, while it was only 0.7% in France. Portugal experienced growth of 2.3%. “And again, the forecast shows that this will continue.”
The last factor is less well known and relates to the net debt of States, that is to say the overall position of a nation vis-à-vis the rest of the world. A country’s situation is favorable when private net assets are greater than the state’s public debt. “These countries are said to have a net claim on the rest of the world,” explains Eric Dor. This is a good situation because, in finewe do not depend on funding from the rest of the world.”
During the sovereign debt crisis, countries that were most dependent on external financing suffered the most. Greece in the first place: foreign investors no longer had confidence and shunned Greece which went straight into the wall. “Today, Spain, Portugal and France are in debt to the rest of the world. But this debt tends to decrease on the Iberian side, while it tends to increase on the French side,” continues Eric Dor.
Of the five countries qualified as PIIGS (Portugal, Ireland, Italy, Greece and Spain) during the sovereign debt crisis, three have clearly emerged from the rut. Portugal and Spain are on the right track, Ireland is running huge surpluses and no longer knows how to spend its public money. Greece, for its part, is now well below the 3% deficit target, at 1.6% in 2023 and soon at 0.8% in 2025. Its debt, which remains very high, will increase from 162 % to 149% in the same period of time. On the other hand, Italy remains the enfant terrible of public finances in the euro zone. Its debt will rise from 137% in 2023 to 141.7% in 2025, according to forecasts.
Belgium and sanctions
And Belgium in all this? She clearly received her invitation card to “Club Med” for some time. Our country can count on a positive net foreign debt, but all other indicators are in the red. With unchanged policy, our deficit will be 4.7% next year and our debt will increase to 106.6% of GDP. In the longer term, the Planning Office even forecasts a deterioration of the deficit to 5.6% and a debt to 116.8% of GDP in 2029. The burden on the debt currently exceeds 10 billion euros and is, there again, one of the first items of expenditure. If you add an employment rate which remains a structural problem in our country, Belgium’s position is, a priori, not much more enviable than that of France. The Portuguese 10-year rate has also fallen below the Belgian rate.
Belgium and France are at the heart of an excessive deficit procedure. Europe expects from them a tangible trajectory that will put them on track fiscally. Otherwise what? That’s the whole question. Since the entry into force of the Stability Pact, few countries have actually suffered financial sanctions. And for years France has been getting a slap on the wrist, without consequence. How to sanction the second economic power of the Old Continent?
The European Commission, in search of credibility, is still asking itself the question. For now, this is wishful thinking, but it remains to be seen whether the recent reform of budgetary rules will change things. Belgium, as a “small” country, undoubtedly cannot afford the largesse of its neighbor and will be more punishable.
But if we stick to the markets, they seem to give a little more credit to the sustainability of the Belgian debt. The explanation here is partly political. Michel Barnier’s government has an unknown lifespan. “The context is that we don’t know if he will succeed in carrying out his 60 billion euro effort,” comments Eric Dor. On the other hand, in Belgium, a stable majority seems to be emerging, with the desire to take measures aimed at respecting the Stability Pact.”
Public spending
In both cases, it remains to be clarified how to reduce these famous public expenditures. With an advantage for our country, according to the IESEG professor: “Belgium, Spain and Portugal have already managed to drastically reduce their spending, unlike France.” Indeed, from 1995 to 2007, our country managed to reduce its spending by 4% of GDP, Portugal by 7.1% between 2013 and 2019.
In short, nothing insurmountable for France: “We must of course avoid excessive austerity which would be counterproductive, but many European countries have already managed to significantly reduce their public spending recently. In comparison, the effort envisaged by France is quite banal,” concludes the economist. Furthermore, this budgetary rigor, as we prefer to call it today, seems to have been successful for those who have practiced it recently.
“The effort envisaged by France is quite banal.”
In the meantime, the Belgians and the French can always serve as guarantors for their leaders. With their savings of several hundred billion euros and a savings rate among the highest in the euro zone, they remain a great source of financing and calm for the markets: the Belgian state bond launched on last year clearly demonstrated this. It is also for this reason that our two countries maintain a rather favorable rating from the rating agencies. But be careful of the slippery slope. Tomorrow, the Fitch agency will look at the French case, Moody’s will do the same on October 25.
