The French government is exploring ways to increase defense spending without raising taxes or increasing the public deficit. Prime Minister François Bayrou has proposed a national loan, potentially leveraging citizen savings, though no final decisions have been made. The government seeks to attract public interest by offering competitive returns on the loan, while also engaging private and European investments to bolster defense funding. Options include redirecting existing savings or creating dedicated funds for military initiatives.
Exploring Funding Options for Defense Expansion
The French government is actively seeking ways to bolster defense spending without disrupting the existing social model, increasing taxes, or exacerbating the public deficit. Prime Minister François Bayrou has set a timeline of “weeks, perhaps up to two months” to devise strategies for mobilizing additional resources while reforming public operations.
The Concept of a National Loan
On Friday, François Bayrou mentioned the potential for a national loan as a viable option, although he clarified that no decisions have been finalized. This approach would allow for tapping into the savings of the French populace, whether voluntarily or mandatorily, marking a return to a practice not seen since 1993 under Edouard Balladur.
In June 2009, President Nicolas Sarkozy considered initiating a new loan from French citizens but ultimately withdrew the plan due to anticipated costs exceeding those of market borrowing.
Attractive Interest Rates and Investor Confidence
Traditionally, France funds itself via institutional investors like banks and insurance companies. However, with a national loan, the government can sidestep direct market engagement, which has seen rising interest rates, according to Eric Dor, director of economic studies at IESEG School of Management. This strategy could not only instill confidence in investors regarding the state’s ability to mobilize national savings but also potentially reduce market rates, similar to the outcomes observed in Belgium in 2023.
Assessing Public Interest in National Loans
The key question remains whether the French public would be interested in a national loan. While trust in the government plays a significant role, the attractiveness of the offered returns is paramount. To entice investors, the loan must provide a yield that surpasses existing savings options like the Livret A and Livret de développement durable et solidaire (LDDS), which currently offer 2.4%. Additionally, the interest rate should remain below that of ten-year bonds available in the market, allowing the state to benefit from the fact that ordinary citizens cannot easily access these bonds without incurring high costs.
Incentives like tax exemptions on gains from the Livret A could further enhance appeal. Eric Dor believes there is potential to raise tens of billions if the terms are favorable, yet he cautions against creating excessive competition with banks and insurance, which could lead to destabilizing withdrawals.
Utilizing National Savings for Defense Initiatives
French savings represent a substantial resource, with life insurance balances exceeding 2,000 billion euros and Livret A and LDDS accounts surpassing 600 billion euros as of January. The Ministry of Economy and Finance has assured the public that there will be no confiscation of personal savings.
To finance the defense sector, the Prime Minister has suggested the creation of a dedicated savings account as one of the possible solutions. A proposed “sovereignty defense savings account” was rejected by the Constitutional Council in 2023, but there may be opportunities to redirect existing regulated savings towards defense initiatives, which had previously received Senate approval before its dissolution. Additionally, Minister of Economy Eric Lombard has advocated for the establishment of more specialized funds dedicated to defense.
Engaging Private and European Investment
On March 20, Eric Lombard and Minister of the Armed Forces Sébastien Lecornu plan to convene banks, insurance firms, and investment funds to encourage investment in the defense sector, emphasizing that current regulations often hinder such investments. In Bercy, there is an expectation for a strategic plan that will outline budgetary commitments necessary for increasing military procurement.
France can also leverage a portion of the roughly 800 billion euros in European funds recently announced, which includes 150 billion available as loans. MEP Raphaël Glucksmann has advocated for a greater European investment share and mentioned a proposal for a “common loan of 500 billion” that will be presented to the European Parliament next week.