How bad could things get in France?

It was a French politician, Valéry Giscard d’Estaing, who coined the term “exorbitant privilege” in the 1960s. He was referring to benefits received by America as issuer of the world’s reserve currency—namely, the ability to run high deficits comfortably. These days France is reminded it has no such privilege. Ahead of parliamentary elections on June 30th and July 7th, its hefty deficit and growing debt are central to the campaign. On June 19th the European Commission said it was preparing to put France into an excessive-deficit procedure, the eu’s fiscal torture chamber, meaning the country’s politicians will have to come up with a plan to fix things.

The commission’s officials have reason to do so. France has an American-style deficit of 5% of GDP, which its central bank expects to come down only slowly. The country’s debt-to-GDP ratio of 111% is similar to Italy’s before the euro crisis in the early 2010s, and is set to rise. S&P Global, a ratings agency, downgraded France’s sovereign-debt rating from AA to AA- on May 31st, before Emmanuel Macron, France’s president, gambled on elections that may bring the hard-right National Rally (RN) or the left-wing New Popular Front to power, under his continuing presidency.

Now markets are worried. The yield on French debt is similar to that on Portugal’s and its spread over German bunds, Europe’s benchmark, has widened to 0.7 percentage points. France’s stockmarket is down by 5% since the European Parliament elections on June 9th, which prompted Mr Macron to gamble. Share prices of companies focused on the domestic market have been hit especially hard. France’s two largest banks, BNP Paribas and Crédit Agricole, have lost 11% of their value.

How bad will things get? No big political party wants to quit the euro or the EU. Nor, as French analysts rush to point out, is the country on the brink of a “Liz Truss moment”, referring to the blowout of British gilt yields after a mini-budget in September 2022. Foreign buyers of sovereign and corporate French bonds are staying put. Contrary to warnings from Bruno Le Maire, the finance minister, even a victory for the hard right or left would be unlikely to prompt a crisis. France benefits from decent economic growth, which the OECD expects to be 1.3% next year, and manageable debt-servicing costs, at 2% of GDP.

The problem is that, without spending cuts, France’s deficit will widen to 5.7% this year and 5.9% next, according to the French senate’s finance committee. Even if this is not crisis-inducing, it is a large and growing problem. Mr Le Maire has already cut around €20bn (0.7% of GDP) from state spending this year, reducing outgoings on things such as energy subsidies and state aid. Further reductions were put off until after the European elections.

Both the RN, polling in first place with over 30% of voters, and the left bloc, at just under 30%, are far ahead of Mr Macron’s centrist alliance, and have spending plans that would add to the deficit. The right-wingers want to cut levies on electricity and petrol, and exempt employers from paying taxes if they raise salaries. The leftists’ ideas are strikingly similar: they want to raise the minimum wage and bring down energy and food prices. Both groups also want to repeal Mr Macron’s pension reforms that raised the age of retirement to 64 from 62, although the RN has rowed back on plans to do so straight away.

This could lead to a clash with the European Commission and the markets. Yet if the RN is victorious it might be reined in by the need to attract centre-right voters, who tend to favour lower deficits, at the crucial presidential election in 2027. It would also have to negotiate the EU’s next budget, and would want to keep generous agricultural subsidies, for which it would need the support of allies. The hope is that, once in power, the RN would mellow in the manner of Giorgia Meloni, Italy’s hard-right prime minister.

A clash with the commission is thus likely, but also likely to end in compromise, says Jeromin Zettelmeyer of Bruegel, a think-tank. More problematic is the fact that even if a party wins a majority in the forthcoming elections, it will inherit a poisoned chalice. The victor will have to oversee spending cuts that will harm growth and prove unpopular, or risk chaos. Although there is no such thing as a bad election to win, the celebrations of France’s next prime minister may not last long. ■

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