Is the 2025 budget, beyond European ratios, a matter of credibility for the financial markets from which we borrow to cope with France’s budget deficit?

Yes, the 2025 budget is a key factor. Beyond adhering to European criteria, investors watch for the long-term sustainability of public finances. Budgetary drift or the lack of a clear plan to restore public finances can quickly make borrowing more costly for the state. Markets, especially bond investors, adjust their demands based on perceptions of sovereign risk, impacting debt costs. A loss of confidence often translates to rising interest rates to compensate for increased risk.

Since June 9, with political uncertainty caused by the European elections and the dissolution of the National Assembly, investors have been closely watching France. They have somewhat penalized the CAC 40 and French bonds. The index is underperforming compared to the DAX, which regularly hits records. As for the 10-year yield spread between Germany and France, it has been rising since February 2021. This month, the French 10-year bond rate doubled that of Spain after already surpassing Portugal’s in June. More worryingly, the 5-year French bond cost now exceeds that of Greece (!) and Spain. France is clearly heading in the wrong direction, particularly in a delicate geopolitical and economic context.

Upcoming Opinions from Rating Agencies on France’s Credit Quality: What Real Impact Do They Have on Our National Borrowing Costs?

These agencies wield significant influence but are also criticized for their oligopolistic position and failure to predict the 2008 crisis. Their ratings reflect the state’s capacity as a borrower on financial markets to repay its debt. In theory, as long as the euro and the European Central Bank’s (ECB) money-printing capabilities, used as a firewall, exist, France faces no immediate threat. The ECB will, come what may, “do whatever it takes” (as declared by then-President Mario Draghi on July 26, 2012). Generally, rating downgrades by these agencies have a minimal impact as they are often anticipated (as was the case for France’s ratings in 2012 and 2013). However, in a crisis climate, they can catalyze existing trends, as seen during the Eurozone debt crisis (2010-2012) when Greek debt was under attack. It’s best not to hand speculators the stick with which to beat oneself.

Are These Opinions Political or Objectively Based on Purely Financial Issues?

Rating agencies can make “political” decisions. This was evident when Standard & Poor’s and Fitch downgraded the UK during the Brexit process in 2016 (which ultimately did not harm growth). I may be mistaken, but, generally, rating agencies have no interest in crippling the economy of an allied country like France, particularly during conflict with Russia. If France were downgraded this winter, 10-year rates currently at 3.00% could rise to 3.15% before easing. This 3.15% level is significant; it would be preferable not to cross it.

France Continues to Be Pursued for “Excessive Deficit” by the European Commission. What Is at Stake?

According to the European Council, the excessive deficit procedure aims to ensure that all member states return to budgetary discipline and avoid excessive deficits, keeping public debt low or reducing high debt levels to a sustainable position. On July 26, 2024, France was placed under this procedure along with Romania, Slovakia, Poland, Hungary, Malta, Belgium, and Italy.

Not the First Time, Sadly!

Indeed, this is not the first time France has been subject to this procedure. It was already under it from 2003 to 2007 and then from 2009 to 2017 following the 2008 financial crisis and the euro crises of the 2010s. However, France has never faced financial penalties. To impose a fine, it’s not enough to be placed under the excessive deficit procedure; Brussels must also demonstrate a lack of government will to restore public finances and reduce the deficit below 3% of GDP (it was 5.5% in 2023 and is projected to exceed 6% in 2024). Like its predecessors, the Barnier government proposed a multi-year budget reduction plan, aiming to return below the 3% mark by 2029. Until now, such initiatives have always sufficed to convince Brussels. However, the patience of European institutions may eventually run out.

Could a Financial Penalty from Brussels Worsen the Situation for France? Isn’t It Inconsistent to Impose Such a Fine on a Country Already in Deficit?

The fine tied to the excessive deficit procedure amounts to 0.05% of GDP and accumulates every six months. For France, this represents roughly €2.7 billion per year. Given the complexity and duration of this process, the earliest possible deadline would only come in early 2025. While €2.7 billion is substantial, it represents a drop in the ocean of France’s public finances.

The fine’s purpose is not to worsen a fragile financial situation for a member state but rather carries a political dimension. It becomes extremely difficult for a government to justify to taxpayers that their taxes now go toward paying a fine resulting from governmental incompetence. This scenario can trigger rapid changes in government or drastic budgetary adjustments. However, despite numerous excessive deficit procedures over the years, no Eurozone country has ever faced a financial penalty, often due to political negotiations or granted extensions.

Why Does France’s Debt Occupy So Much Public Space When, in the U.S. or Japan, for Example, It’s Not at the Heart of Public Debate? Neither Trump nor Harris Mentioned It During the Electoral Campaign!

Unlike the U.S. and Japan, France lacks certain structural advantages that mitigate debt concerns in those countries.

Will This Concern President Trump? Is It a Priority for Him?

In the U.S., the dollar is the world’s reserve currency, prompting countries worldwide to hold it in reserves, either as currency or U.S. bonds. This greatly facilitates public debt financing. Additionally, America’s economic might reassures investors, relegating debt to a secondary issue in public debate. “The dollar is king.”

And Japan?

In Japan, debt is primarily held domestically—about 90%—limiting systemic risk. In the U.S., roughly 80% of debt is held by Americans. In contrast, only 50% of French debt is held domestically, increasing its vulnerability to international markets.

Moreover, France lacks direct control over its currency, being merely a member of the Eurozone. Finally, France must comply with the aforementioned European budgetary rules. These constraints, absent in the U.S. or Japan, heighten scrutiny of French debt.

Is France Condemned Never to Achieve Fundamental Economic Reforms?

France is not inherently condemned to stagnation but is off to a poor start. Since the late 1970s, French politicians have primarily pursued interventionist—so-called Keynesian—policies and continually increased the state’s role. They have demonstrated incompetence for decades. Today, the result is an inefficient bloated state that, regardless of its government’s political leanings, believes every problem can be solved by debt or tax increases. Unfortunately, behind every euro borrowed is a creditor—international half the time—who must be repaid.

In this sense, the Barnier government does not inspire confidence, far from it. It appears set to repeat the same policies applied for 50 years. Instead of reducing taxes and state spending, it will raise taxes without truly addressing state spending. A recession seems inevitable. Recent statistics on business failures reflect a genuine entrepreneurial disaster. The last time we spoke, it was about Argentina. I told you that France was heading down the same path. Since then, the trajectory has not changed.

(*) Head of Research at XTB France