French Government Faces Uncertainty
Only a few doubt that Prime Minister Francois Bayrou will lose the vote in the French parliament planned for Monday, since the current French government is missing the majority that is necessary to search its budget plans for reimbursement in the public debts of France.
What Happens Next
What happens next is uncertain. Whether new elections are called, as the right-wing extremist racial emile national or President Emmanuel Macron, another minority government, demands the political side of the crisis.
The French right-wing extremists led by Marine Le Pen and Jordan Bardella benefit most from a collapse of the government. In economic terms, it’s about money and France’s highly towering debt load. In absolute terms, no EU country has more consolidated public debt than France. The sovereign debts have increased to around € 3.35 trillion – about 113% of gross domestic product, whereby the number is expected to increase to 125% by 2030.
Europe’s Debt King
The relationship between France’s debts and GDP is so high that only Greece and Italy outperform it within the European Union. With a budget deficit of 5.4% to 5.8% this year, Paris also operates the largest budget credit in the 27-nation-EU. In order to achieve the goal of the EU to reduce the deficit to 3%, drastic savings are inevitable.
Financial Markets React
Since the cuts are currently politically unsustainable, the financial markets have reacted with higher risk premiums for French bonds. While German bonds have an interest rate of around 2.7%, the French government has to pay almost 3.5% interest for its debts. So should we worry about the stability of the only European currency, the euro, if the finances of the second largest economy of the euro zone get out of control?
Expert Opinion
"Yes, we should worry. The euro zone is not stable at this point," says an economist, although it is "not concerned" about a new short-term debt crisis in the coming months. "But we have to ask ourselves where this is going when a large country like France, which in recent years have had a steadily increasing debt rate, is now also exposed to further political destabilization."
Global Bond Markets Under Pressure
Other important economies collect historically high debts and have to increase billions on the capital markets. This autumn, for example, Germany, Japan and the United States have to issue new government bonds to finance their expenses – an important reason why the global bond markets are under pressure.
European Central Bank Under Pressure
The only reason why the markets are not even more nervous – which means that the spreading to French bonds does not increase further is the hope that the European Central Bank will enter French bonds and stabilize the market. "But this hope could be laid because the ECB has to make sure not to undermine its credibility."
Long-Term Political Dilemma
It was a long-term political dilemma for successive French governments that if they propose austerity measures or economic reforms, parties mobilize parties on both the left and on the right scream foul and their supporters. The unions already called a general strike for September 10, two days after the vote of trust.
EU Commission and ECB Under Pressure
France now only spends 67 billion euros on interest payments annually. And it is under pressure because it has committed to gradually reduce its deficit in accordance with the EU rules. But an economist also puts part of the guilt on the steps of the EU Commission because it "contributed to creating this chaos".
Need for Reforms
According to an economist, France, like Germany, urgently need great welfare reforms and spending cuts. The alternative would be higher taxes in a country that already imposes heavy tax burdens on both the citizens and the company. An economist is therefore skeptical that French politics can achieve cross-consensus consensus on debt reduction.
Risks for Other European Markets
For another economist, the risks for other European markets remain manageable for the time being. "So far, the problems seem to be largely limited to France itself as long as the extent of the French problem is not too great," he said. But he warned of scenarios in which the crisis of France could escalate considerably, which increases the risk of infection.
Bad Timing for a Political Crisis
France’s turbulence takes place at a time when the EU is conflict with the United States because of trade policy, including higher taxes on US tech giants proposed by France. It is a bad time for the EU to be weakened by political deadlock in its second largest economy. For an economist, many political actors in France are "Trumpists in the heart", especially left and right in the political spectrum.
Risk of Trade War
"You could increase the pressure on the European Commission to take revenge against Trump’s tariffs with European tariffs," warned the economist, which would "increase the risk of a real trade war" and further deteriorate the country’s debt crisis.
