France is facing a severe economic downturn, marked by rising public deficits, high unemployment, and escalating government debt. Interest rates on French bonds have surpassed those of Greece, signaling a crisis of confidence among investors. The country’s public deficit is projected to exceed 6% of GDP, while public debt has reached alarming levels. There is a call for “benevolent shock therapy” to restore economic stability through tax cuts and significant reductions in public spending, emphasizing the need for immediate action to avert further decline.
The Alarming Decline of France’s Economic Landscape
From various perspectives—economic, political, social, and societal—France appears to be experiencing a significant downturn that many seem to overlook. Recent developments underscore this unsettling trend: government censorship, repeated errors regarding the 2025 budget, a notable decline in President Macron’s popularity, and escalating public deficits and debts have spiraled out of control. The situation is compounded by deteriorating indicators of economic activity and rising unemployment rates, painting a grim economic and political picture. Even the appointment of a new Prime Minister is unlikely to alter this trajectory.
Rising Interest Rates Signal Financial Instability
Adding to the turmoil, the interest rates on French government bonds remain alarmingly high, even with backing from the European Central Bank (ECB). In fact, during the week of December 2, these rates surpassed those of Greece and have since stabilized at elevated levels. The spread of 10-year interest rates between France and Germany reached 90 basis points, the highest since the summer of 2012, settling around 80 basis points, which is still significantly high. Additionally, the France-Portugal spread has increased by 30 to 40 basis points since last October.
Trust Erosion in France’s Financial Stability
For the first time, the 10-year interest rate on French government bonds has exceeded that of Greek bonds, highlighting a critical crisis of confidence among financial markets and investors. This predicament is warranted, as France stands out as the only Eurozone nation to have increased its public deficit over the past two years. Alarmingly, it is also the sole country facing a procedure from the European Commission for excessive deficit, with the prospect of failing to meet its commitments for 2025.
To further complicate matters, the 2025 budget is set to mirror that of 2024, which predicted a 1.5% economic growth rate. However, leading indicators suggest that French GDP may decline in the fourth quarter of 2024, with a meager growth forecast of just 0.5% for the following year.
Concerning Economic Indicators and Public Debt Crisis
The public deficit is projected to exceed 6% of GDP in 2025, marking France as the Eurozone nation with the highest deficit for the second consecutive year. This situation could trigger a renewed wave of distrust, leading to rising bond interest rates and widening spreads with other Economic and Monetary Union (EMU) members. The current state of France’s public finances is dire, with public debt nearing 3,300 billion euros, representing 115% of GDP.
Initially, in March 2020, the global crisis necessitated an increase in public debt to mitigate the impending economic fallout. However, the continuation of this trend post-2020 has proven to be a grave miscalculation. My warnings to the authorities have gone unheeded.
Regrettably, this accumulation of public debt has yielded dismal economic performance. Since early 2020, public debt has surged by approximately 850 billion euros, while the inflation-adjusted GDP has increased by only 450 billion euros, resulting in a staggering shortfall of 400 billion euros. This trend of inefficiency is not new, as France has not recorded a public surplus since 1974. The decline in structural growth—from 2.5% annually in 1980 to just 0.9% today—has exacerbated the rising public debt, which has ballooned from 20% of GDP in 1980 to nearly 115% today. Alarmingly, 54.6% of this debt is held by non-residents, increasing our dependency on external stakeholders and threatening our sovereignty.
The Sustainability of Public Debt in France
The real tragedy lies not just in the level of public debt but in its sustainability. A debt is considered sustainable if it generates sufficient income to cover annual interest payments. Unfortunately, France has not achieved this since 2007. With the recent rise in interest rates on government bonds, the interest burden on public debt is projected to reach 60 billion euros annually, potentially escalating to 75 billion euros soon.
This situation has become untenable, especially as rising interest rates affect all types of credit for businesses and households. This cycle perpetuates a decline in economic activity, leading to higher unemployment rates and escalating public deficits and debt—thus continuing the vicious cycle of rising interest rates until a breaking point is reached. The crisis of confidence in the French state’s ability to reduce its public deficit will, without a doubt, intensify, worsening the recession that is taking hold of the nation.
However, there is a glimmer of hope. A budgetary recovery for France is indeed feasible. To effectively reduce the deficit and revitalize the French economy, we must implement what I term “benevolent shock therapy.” This approach involves two critical strategies: first, a tax reduction for both businesses and households aimed at restoring confidence and stimulating economic growth; and second, a significant cut in public spending, especially operational expenses that have surged by over 15% in the past three years. This approach is essential, as a responsible company begins by trimming operational costs when faced with deficits. It is time for the state to adopt a similar strategy.
Marc Touati, economist, president