“France has never defaulted”

Lyon Capital: In his general policy declaration to the Assembly, Michel Barnier announced his intention to reduce the public deficit to 3% of GDP by 2029, after an expected slippage to 6.1% this year. To achieve this, the government plans to find 60 billion euros from next year. Around two thirds of this budgetary effort, or 40 billion, will come from a reduction in public spending. Does this seem realistic to you?

Kathie Werquin-Wattebled: To begin with, I always remind you that we are completely independent of the State. We manage monetary policy. The State manages budgetary policy, which is based on societal choices. Afterwards, it is not because we are very independent that we should not pay attention to the articulation of these two policies. State policy should not be neutralized and vice versa. We need to talk together. It's important. This is why the governor of the Bank of France regularly speaks in the press. His words are based on objective facts, including the growth projections that we publish each month. His speeches are not intended to say what the government should do, but they can serve to raise awareness. For example, our models clearly show that reducing government spending, and therefore the public deficit, too quickly could push millions of people into poverty. Recently, we had a good glimpse of this with Argentina and its new government, where more than half of the population lives below the poverty line.

How is this independence of the Bank of France from political power embodied?

Before Covid, we had very low key rates. When I gave interventions, I was told that we were at the behest of the government to help it finance itself. We then had a big moment of solitude in 2022-2023 when we raised rates by 50 to 400 basis points. I think we clearly showed that our fundamental objective was inflation at 2%. We only did our job. We knew that this was going to have an impact on growth and state debt. To understand: in 2020, the debt burden was 29 billion. It was a magical moment because the more the State went into debt, the less it cost it thanks to negative rates. In 2024, we are already at 58 billion in debt costs. The problem is that according to our current projections, we are at 80 billion debt burden for 2027. Concretely, this means that on January 1, when the State starts its year, it has not yet paid a professor, nor a doctor, nor any civil servant, nor invested anywhere, nor renovated a hospital, nor built a school, but already he must collect taxes to reimburse 80 billion.

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Economists and public agencies have been warning about the debt crisis for years. The Bank of France too. Today, do you have the impression that France is coming out of denial and realizing that it was living beyond its means?

Yes I believe it. I believe that today the French are all aware that we will not be able to continue as before. Everyone has heard about the weight of debt, all generations combined. I think it's positive. This is important because to implement a policy there must be a majority of people who agree with it. I think there has been an electric shock in recent months. Moreover, it is quite impressive to see the moderation of representatives of businesses and employers' unions on the debate between tax increases and spending reductions. We can clearly see that there is no one who opposes it head-on. The next step should be for each actor – State, community, ministries, companies, etc. – to manage their own contradictions, particularly regarding spending reductions. Everyone agrees on the principle but first for the others. It could be about covering the unemployment rate or about health reimbursements… Health has no price, but it has a cost. I think that each economic actor should ask themselves if they are living beyond their means, as well as their degree of acceptability of budget reductions.

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We are talking about an unbearable debt burden. Concretely, what does this mean?

Let's be clear. It is extremely unlikely that the “France signature” will no longer find investors to finance its debt. I hope I never see this in my lifetime. For the moment, it is unimaginable that investors would say that it is too risky to finance France. Concretely, it is not today that France will default on the repayment of its debt. We still have the chance to be in the euro zone, which protects us. I would like to know how France would finance itself if we were still in the franc. No, when we say that the debt is unsustainable, it is when the economy is slowing down. When companies work, pay VAT, pay corporate tax and this is primarily used to pay the public debt instead of anything else. So this is what is happening.

If I follow you, deep down, is France too big to fall?

Yes, we can see it like that. When a foreign investor buys our debt, he knows very well that the European Union imposes constraints. Concretely, France will have to reduce its public deficit to 3% in 2030. This system therefore acts as a safeguard in relation to a country which can do what it wants in terms of its budget. This is not our case. Then, we are still a country which has a reputation, a history and weight in the world. France has never defaulted. Especially since it is today more interesting to finance our debt than that of Germany. Investors get paid more with us. There are therefore many reasons to lend to France. There is no risk of final default.

But then is the debt burden really a problem if we are still able to borrow? Japan, where the debt is based on national financing, has held up well for several decades with a debt of 266% of its GDP.