Nationwide protests over the cost of living rocked France on Saturday, adding to unrest over public spending and debt ahead of a critical vote in the National Assembly.
Riots broke out in some cities: luxury boutiques and supermarkets were looted while public buildings were damaged or even set on fire.
It followed mass protests earlier this month, with students denouncing dilapidated classrooms, missing teachers and buildings that are not equipped to handle rising temperatures. Protesters blamed years of underinvestment in public education.
At the same time, France’s looming debt has sent bond yields to their highest levels in 24 years, signaling warning signs not seen since the 2011 eurozone debt crisis.
With far-right and far-left candidates leading the charge to become France’s next president this spring, markets are losing confidence in both camps’ ability to take the painful steps needed to bring the deficit under control.
For Mujtaba Rahman, general manager for Europe of Eurasia Group, France is suffering from a crisis of liberal democracy, a crisis of budgetary mismanagement and a crisis of disaffection among young people.
“But the budgetary crisis is the most dangerous, because it is the source of many of the country’s misfortunes and threatens to bring it to ruin,” he wrote in a statement. New York Times editorial Thursday. “France, truly, is on the brink of the abyss. »
The crises are also linked to each other. For example, Rahman pointed out that although France’s education spending exceeds the European Union average, more than a quarter of the money goes to pensions for retired teachers.
Nobel Prize winner Paul Krugman also drew a straight line between France’s pension largesse and student unrest. Because of its very generous pension plan, education spending has suffered, meaning France is effectively subsidizing older French people at the expense of everyone else, he wrote in a Substack article last week.
France’s public debt has now reached a record $4,000 billion, or 119% of GDP, the highest ratio since the immediate aftermath of World War II.
As the pandemic as well as wars in Ukraine and Iran have worsened France’s fiscal situation, President Emmanuel Macron has also abandoned reforms intended to bring debt under control.
Sébastien Lecornu, the latest in a series of prime ministers, has proposed a 2027 budget that would modestly reduce the deficit to 5% of GDP from 5.4%, and faces a critical first vote in the National Assembly on Tuesday.
“If his government fails to pass the budget, the cost of servicing France’s debt could explode,” Rahman predicted. “France could be forced to seek help from the International Monetary Fund and pray for it from the European Central Bank – a humiliation for the world’s seventh-largest economy.”
The market’s distrust of France is more political than economic, with fears that it will become ungovernable, with the far left and far right unlikely to make the necessary changes, he added.
Indeed, far-right leader Marine Le Pen has pledged to reduce the official retirement age to 62 and has even previously suggested lowering it to 60. Meanwhile, far-left presidential candidate Jean-Luc Mélenchon is campaigning on a plan to have the central bank simply cancel its holdings of French debt.
Such positions help explain why bond investors have pushed France’s borrowing costs to dizzying levels, Rahman said. “The country, they fear, is becoming socially unstable and institutionally paralyzed. »
In fact, the presidential election in May will not even be decisive for financial markets, as the legislative elections in June may fail to achieve a parliamentary majority for the new president, creating a new political impasse, he said.
France could avert imminent disaster next week if Le Pen orders her allies in the Assembly to abstain on the budget, allowing it to pass.
“This could avoid, for the moment, the kind of collapse that Greece experienced after the financial crash. But France is no longer master of its destiny,” warned Rahman.
An explosion in borrowing costs would indicate that France is at the mercy of the bond market, which has begun to price in the growing risks of defaulting on its debt. This is similar to how the UK is effectively in thrall to the so-called bond vigilantes.
Thierry Wizman, global FX and rates strategist at Macquarie Group, said in a note on Tuesday that a series of convulsions would need to occur for France to get its act together and calm the bond market.
This could include a vote of no confidence that would leave France without Assembly governance, a downgrade of Moody’s credit rating, an intensification of street protests and violence, a sharper and contagious rise in the French bond yield spread, and the election of Le Pen as president.
The European Central Bank would also not come to the rescue quickly, for fear of encouraging “moral hazard,” and other rescue mechanisms do not have the firepower needed for an economy as large as France’s, Wizman argued.
“In any case, it appears that we have to cross the valley before we get to the other side of the divide when it comes to fiscal responsibility,” he added. “And only After all these transformational sufferings of the coming months, may France find its backbone and commit to austerity.
Gn world
