Zaid M. Belbagi
The Financial Times in March claimed that France was “becoming the new Britain,” riding the wave of international business relocations and free market reforms that were underway. As foreign direct investment into Paris climbed above those going into other European capitals, it seemed that France was experiencing a post-pandemic boom, with falling energy imports and firm business investments offsetting a fall in consumer spending. However, after months of political upheaval and social disturbance, the current reality is markedly less upbeat.
Shortly after being downgraded by Fitch, France this month narrowly missed another negative review by S&P. As the economy begins to buckle under its debt burden, France’s prospects of unseating London once again seem distant. In fact, King Charles’ first state visit to France since becoming monarch – which was billed as a “celebration of Anglo-French relations” – was discreetly postponed as burning cars and tear gas adorned Parisian streets in lieu of the blue and red bunting. Successive strikes and violent demonstrations met the president’s invocation of special executive powers to bypass parliament to raise France’s legal retirement age. Though this will now come into law, the experience has left ratings agencies jittery. Despite Finance Minister Bruno Le Maire and Prime Minister Elisabeth Borne going to great lengths to present France’s public finances to S&P in the best possible light and the country avoiding a further downgrade, the recent meeting does not bode well for France. The eurozone’s largest economy is now forecast to remain stagnant, which in the current global economic circumstances is explicable, but the nation’s financial situation is staggeringly precarious.
Having left the group of 10 countries with the best economic ratings, France’s gradual regression since losing its prestigious AAA rating a decade ago has now become more severe. Months of disturbances and protests have not helped. However, more concerning to a government that has sought to jump-start the economy is that the hard-won pension, unemployment insurance and production tax reforms seem not to have registered with international agencies, which remain principally concerned with the country’s wider deficit and debt. These, according to Fitch, will be difficult to reduce amid France’s “political impasse,” which can often lead to “sometimes violent” social disturbances. In May, the French economy grew at its slowest pace in recent months, as the services sector lost momentum.
The very sector that President Emmanuel Macron had hoped to cultivate in order to make France more competitive is sluggish and, in some cases, shrinking. Poor ratings will exacerbate this issue, with the French private sector seeing valuations fall as a result. Despite private sector employment having risen at its strongest rate in almost a year, recent data has shown a marked softening in business confidence as sagging demand and concerns over the domestic situation hit hard.
The shrinking business sector comes after record inflation has already eroded household purchasing power and caused the largest rise in production costs since July 2020. It is little surprise, therefore, that a Reuters poll of economists’ expectations has forecast 0.0 percent growth. Such news is concerning for France’s government, which was relying on growth, as Le Maire has said, “to accelerate France’s debt reduction and reduce the public deficit to below 3 percent by 2027.” That is, of course, because France has huge debts. Aside from the gargantuan 55.6 percent of its gross domestic product that goes on public expenditure, the French government borrowed vast amounts – “whatever it takes,” in Macron’s words – to protect households and the private sector during a succession of draconian lockdowns during the COVID-19 pandemic. With debt having now surged to 111 percent of economic output, in comparison to Germany’s 66 percent, France has seen itself drawn into the troubling group of Southern European countries, such as Greece and Portugal, which hold the EU’s highest debt ratios. The debt is so high that the Banque de France estimates the country accounts for 8.1 percent of global debt liabilities. This figure, which is second only to the US, is reflective of decades of borrowing to support government expenditure. With interest rates set to rise further, the government might struggle to meet its obligations. Interest on the French public debt amounted to almost €50 billion ($53 billion) in 2022.
Despite the government’s efforts to attract big business and build the French services and industrial sectors, the reality is that the spending reductions that are now necessary require cuts in politically sensitive policy areas. Just like the tumult following Macron’s pension reforms, the cuts required to placate the avalanche of warnings over France’s finances will require unpopular measures. Despite the French government’s derision of Fitch’s analysis, the US agency’s warning that protests and political deadlock could put pressure on Macron to change course on his fiscal policy or even reverse his reforms reflects a wider lack of confidence in the government’s ability to reduce the deficit. With four more years in office, a minority government and a 26 percent popularity rating, President Macron faces serious political challenges ahead. Increased economic growth and activity, coupled with the cuts in expenditure that are necessary to alleviate France’s debt burden, will require several years to materialize.
However, the president does not have the benefit of time that was enjoyed by his predecessors. S&P has warned that it could lower France’s rating in the next 18 months if debt levels do not fall. Macron’s grandstanding has helped him win a second term; however, his management of France’s debt precipice will seal his legacy.
