France is following Greece’s footsteps… Will the debt crisis repeat itself?

Borrowing costs in France have exceeded their counterparts in Greece, amid investor concerns about the French government’s ability to pass a deficit-cutting budget, according to a report by Britain’s Financial Times, reviewed by Sky News Arabia.

French government spokeswoman Maude Bregon said France was facing a “possible Greek scenario”. Finance Minister Antoine Armand compared Paris to “a high-flying passenger plane in danger of crashing” Is France really facing a debt crisis similar to the one in Greece?

A British newspaper report quoted Eric Heyer, professor of economics at the Institute of Political Science in Paris, as saying: “At this point, this is just a complete exaggeration.”

• France has full access to debt markets. On Monday, 8.3 billion euros were collected.
• The yield on French government debt for ten years is around 3 percent. At the height of the debt crisis, the yield on Greek debt rose to more than 16 percent.
• Greece’s economy collapsed, exacerbated by punitive austerity measures, and Athens was locked in a bitter battle with Berlin and Brussels over the terms of the eurozone bailout.

According to Heyer, the gap between French and German debt has widened by only about 0.3 percentage points during the recent political turmoil in France.

• But investors are unsettled by a combination of political paralysis and deteriorating public finances.
• The public deficit is likely to reach 6.2 percent of GDP.
• Paris is under pressure from the market and the European Union to take corrective measures.

Although France has not had a balanced budget in five decades, it has reached a point where it can no longer rely on economic growth to keep its debt sustainable, the country’s Council for Economic Analysis noted earlier this year.

Budget crisis

France is facing a crisis in approving the budget. According to Antoine Bristel, director of the Opinion Observatory at the Jean Jaures Research Foundation, the reason for the difficulty in passing the budget in the country is due to two factors:

• First: The government does not have an absolute majority, which means that any text requires negotiations with the Party of the National Assembly or the left-wing New People’s Front bloc.
• Second: tight public finances mean Prime Minister Michel Barnier is making tough and unpopular choices to achieve his goal of reducing the deficit from 6 to 5 percent of GDP in 2024.

With so little room for manoeuvre, Barnier said he would likely have to use a constitutional procedure known as 49.3, which allows the government to pass legislation without a vote in parliament but also exposes it to a no-confidence motion.

different situation

From Paris, writer and analyst Abdel-Ghani Al-Ayadi says in statements to the Ektisad Sky News Arabia website:

• I don’t think France is headed for a Greek-style debt crisis; Especially since the situation is completely different in terms of economic and political data.
• France’s public debt is around 110 percent of GDP, which is high but still far below Greece’s debt levels during its crisis, which exceeded 180 percent.
• France’s budget deficit target of 4.9 percent of GDP is worrying, but a far cry from Greece’s pre-crisis deficit of 15.4 percent.
• France is also able to borrow at interest rates in the 3-4 percent range, compared to rates exceeding 10 percent in Greece, ensuring its continued access to global debt markets.

He adds: Thanks to its strong economy (..) and its position as the main mover in the European Union, France has great political and economic weight that helps it avoid difficult scenarios. However, persistent deficits and high debt servicing costs make fiscal reforms, especially of the pension system and public spending, a necessity that cannot be postponed.

He ends his speech by noting that France is not in immediate danger, but needs quick action to ensure its debt sustainability and avoid future crises that could affect its leadership role in Europe.

France is not Greece

According to a report in the British magazine The Spectator,

• Bond markets have decided that French debt is a riskier bet than Greece, a country that nearly destroyed the entire eurozone fifteen years ago with its financial profligacy and irresponsibility.
• It is true that to some extent this reflects the improvement in the position of Greece, as well as the decline in the position of France. But the harsh reality is that France is in dire straits, and President Emmanuel Macron will struggle to fix things.
• It was inevitable that this critical moment would eventually occur. Since Macron threw France’s political system into chaos in the spring with snap elections that did not deliver good results for his ruling party, bond markets have demanded higher prices for holding French debt. As Liz Truss discovered during her short tenure as prime minister, bond markets don’t like uncertainty.

French Economy Minister Antoine Armand said in a statement to the French television channel BFM that: “France is not Greece… France has an economy, employment opportunities, economic activity, attractiveness and far superior economic and demographic strength, which means we are not like Greece.”

But, according to a British magazine report, the French minister’s statements are not at all encouraging, considering the level of the country’s financial deficit (..).

The report adds:

• Macron is not entirely to blame for this unfortunate situation.
• French politics is dominated by parties of the left and right who only want to spend more and more.
• If Prime Minister Michel Barnier’s government can’t pass a budget in the next few days, and it may not, bond prices could start to spiral out of control.
• But even if Barnier manages to find a solution, a bigger problem remains: France’s overspending is structural.
• France has huge and expensive social obligations that are difficult to reduce.

Pressure

London-based economic expert, Dr. Anwar Al-Qasim, speaking exclusively to the Ektisad Sky News Arabia website, says:

• France, like the United Kingdom, faces significant challenges related to high public debt and fiscal deficits, which increase pressures on the national economy.
• France’s national debt, which exceeded 100 percent of GDP, compared to 97 percent in 2019, is a notable increase that reflects mounting financial challenges.
• One of the most prominent economic concerns in France is the rise in government bond yields, especially after Standard & Poor’s downgraded France’s sovereign debt to “AA negative.”
• Although the French economy has elements of strength that avoid a fate similar to what the Greek economy suffered in the past, French bonds, which were once considered an investment paradise close to German bonds, today face major challenges affecting the stability of the economy.

He adds: “Escalating debt servicing costs are increasing pressure on economic growth rates and deepening public deficits… In light of declining financial reserves, a continuation of this trend may prompt credit rating agencies to downgrade France again, which could lead to a difficult economic situation .”

Al-Qasim concludes his speech by stressing that there is an urgent need for strict and swift economic measures to control public debt and avoid worsening financial conditions in the near future.

Why has borrowing soared?

According to a Guardian report, French borrowing has soared after the Covid-19 pandemic and the war in Ukraine caused a global inflationary shock, as the government intervened to protect households and businesses while weak economic activity drained tax revenues.

But analysts also said the tax cuts launched by President Macron as part of his reform agenda to inject more free-market dynamism into the French economy have undermined the stability of public finances.

The news report quoted Leo Barenko, a prominent economist at consulting firm Oxford Economics, as saying, “The main reason for the current fragile financial situation is related to the non-financial tax cuts under Macron.”

The main corporate tax rate has been cut from 33 to 25 percent, while the “solidarity tax” on wealth, which is levied on assets over €1.31 million, has been replaced by a much lower 30 percent tax on capital gains from interest. and dividends.

But taxes as a share of national income – although falling in recent years – remain at the highest level in the OECD. Consumption also reached the highest level among the group of thirty-eight rich countries.

Andrew Cunningham, chief European economist at research firm Capital Economics, said France faces long-term problems, including pension spending of 15 percent of GDP, and “a political culture that makes it difficult to cut spending.”

Alarming situation

For his part, the professor of international economics, Dr. Ali Al-Idrisi, said in exclusive statements to the website “Ektisad Sky News Arabia” that France, despite the increase in its public debt to an unprecedented level, is not currently facing the risk of a debt crisis similar to experience of Greece.

However, he pointed out that France’s financial situation is a cause for concern due to the complex global economic environment and recurring shocks, highlighting a number of key points below:

• French public debt exceeded 3 trillion euros in 2024, representing more than 110 percent of GDP.
• Despite this increase, the rating France As a country with an advanced economy, it gives it flexibility in borrowing compared to countries with emerging economies.
• France still has a relatively strong credit rating, which allows it to borrow at reasonable interest rates, unlike Greece at the height of the crisis.
• The French economy is diversified and significantly larger than the Greek economy, which mitigates the severity of the financial crises.
• As a key member of the Eurozone, France enjoys direct political and economic support from the European Union, which is a major stabilizing factor.

At the same time, he points to a number of challenges facing the French economy, including public spending inflation, as high spending on social protection and public services puts a strain on the budget, and a modest growth rate hampers France’s efforts to reduce debt-to-GDP ratios. .

While Al-Idrisi confirms that Paris is not in a completely comfortable financial situation, he points out that it has the tools and economic flexibility to avoid major crises, stressing the importance of taking serious reform steps to ensure financial stability in the long term.