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France’s Growing Debt Crisis: The Cost of Living on Credit

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Creating a budget in France presents significant challenges, with a national debt of 3.2 trillion euros and a deficit projected at 173.8 billion euros. Prime Minister Michel Barnier proposes a budget plan that includes 60 billion euros in savings and tax increases, facing opposition from both left and far-right factions. Anticipated protests loom as the government navigates public discontent over proposed cuts and tax hikes, while credit ratings decline, complicating efforts to stabilize the economy.

Creating a budget for France can feel like attempting to traverse the treacherous Himalayas without proper gear. This vivid analogy was recently employed by former French Prime Minister Bernard Cazeneuve to illustrate the formidable challenges faced by the current leader, Prime Minister Michel Barnier, who also has a penchant for mountaineering.

With a staggering debt of 3,228.4 billion euros, France has reached an unprecedented level of financial obligation, translating to a debt-to-GDP ratio of 112 percent. Within the Eurozone, only Italy and Greece surpass this concerning debt level, marking a significant embarrassment for the esteemed nation.

Wealthier Citizens to Face Tax Hikes

In France, it has long been a customary practice to exceed revenue generation in governmental spending as a means to stimulate economic growth. This trend has persisted through various administrations across the political spectrum for the past fifty years.

President Emmanuel Macron, who came into power in 2017 with promises of fiscal responsibility, found himself overwhelmed by the Yellow Vest movement. In response, he pledged to restore fiscal balance through growth. However, despite rising debts, the government has not shifted towards austerity.

Now, after seven years of Macron’s leadership, the financial landscape of France has significantly deteriorated. The projected budget deficit for this year stands at 173.8 billion euros, equating to 6.1 percent of the nation’s economic output. EU regulations dictate that member states should ideally maintain new debt levels at a maximum of 3 percent.

Consequently, newly appointed Prime Minister Barnier has been tasked with formulating a savings budget for 2025 to reassure both the Brussels Commission and financial markets. This comes after the EU initiated a deficit procedure against France and six other member states earlier in the summer.

On a recent occasion in mid-October, Barnier unveiled his budget strategy in the National Assembly. His proposals include a combination of savings and tax increases totaling 60 billion euros, with 40 billion euros sourced from spending reductions and 20 billion euros from new taxes.

The government’s plans involve significant cuts, including thousands of public service jobs, delaying pension adjustments, and reducing aid for development and environmental initiatives. On the revenue front, high earners and large corporations with revenues exceeding 1 billion euros will face increased taxes, alongside amplified levies on flight tickets and private jets, as well as a windfall tax targeting energy firms.

Barnier aims to slash the budget deficit to 5 percent by next year and reach the EU’s target of 3 percent by 2029. However, the feasibility of these ambitious goals remains in question.

Controversial Measures and Public Pushback

Resistance to these proposed savings plans is already materializing in both Parliament and among the general populace. The left and far-right factions have voiced strong opposition to the budgetary measures. The left critiques the potential cuts to public services and social welfare, while Marine Le Pen’s Rassemblement National (RN) deems the proposals socially inequitable, positioning itself as a champion for the working class.

Barnier’s coalition, composed of center-right supporters, lacks a majority in Parliament. This polarization means that he must seek alliances with either left-wing or RN legislators for legislative progress. A united opposition, although unlikely due to deep political divides, could challenge Barnier’s government at any moment.

The left has already made attempts to unseat Barnier through a failed no-confidence vote, while the RN remains cautiously observing, willing to tolerate the Prime Minister as long as alternatives are unsatisfactory.

Notably, Barnier might invoke the controversial constitutional article 49.3, which allows the government to pass legislation without a parliamentary vote. Critics have dubbed this tactic “Big Bertha,” likening it to the formidable German artillery from World War I. The use of 49.3 typically incites significant public dissent.

Reports suggest that Barnier has received his cabinet’s approval to utilize “Big Bertha,” a move likely to escalate tensions further in the nation.

Anticipated Protests Ahead

Anticipation of new protests is brewing among the populace. Even recent reforms to the pension system have faced fierce opposition, with polls indicating that two-thirds of French citizens oppose raising the retirement age from 62 to 64. The leftist coalition, Nouveau Front populaire, has even included a return to a retirement age of 60 in its platform, securing electoral success in July.

It is probable that the government will need to adjust some of its proposed cuts. The challenge lies in minimizing new borrowing while ensuring that tax hikes on businesses do not stifle economic growth, all while avoiding social unrest. This scenario truly resembles navigating the Himalayas without gloves.

Whether these measures will suffice to stabilize or improve France’s creditworthiness remains uncertain. At the end of October, Moody’s, a prominent global rating agency, downgraded France’s credit outlook from “stable” to “negative.” Deteriorating credit ratings increase the cost of new loans and refinancing existing debts.

On Tuesday, Parliament is set to vote on a new budget proposal that has undergone substantial amendments from the left. This revised proposal bears little resemblance to Barnier’s original budgetary framework and has been dismissed by the government as “fiscal chaos.” Should the proposal be rejected, it will be sent in its original form to the Senate.

If the Senate approves, the proposal will return to the National Assembly for a final vote, where opposition rejection is likely, prompting the government to potentially resort to constitutional article 49.3.

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