Is France now Greece on the Seine?
Summary
Markets fret about a budget crisis, but slow economic growth is the underlying problem.
Investors are fretting that France may be on the verge of triggering a new eurozone crisis, and the amazing thing is that it took this long for everyone to notice that the country’s public finances, and its economy, are a mess.
We don’t mean to make light of the worry gripping markets in recent days as the National Assembly has failed to pass a budget. The euro fell about 1% against the dollar Monday amid the machinations in Paris, and for a period the yield on France’s sovereign debt was higher than Greece’s. The spread between French yields and eurozone benchmark German bunds last week briefly hit its largest since 2012.
But it’s strange that this should happen as a result of the failure of a budget plan that’s largely illusory anyway. Prime Minister Michel Barnier, appointed less than three months ago by President Emmanuel Macron, failed to secure support for the first part of his budget in the National Assembly. He tried Monday to push the budget through by decree, paving the way for a no-confidence motion as early as Wednesday.
Mr. Macron’s job is safe, but Mr. Barnier’s isn’t. The National Assembly is evenly split among three incompatible factions after Mr. Macron’s snap-election gambit this summer led to a surge of the insurgent right and populist left rather than a boost for Mr. Macron’s centrists.
Brussels technocrats and many investors are worried about the details of the Barnier budget, on the theory that he could reduce France’s projected fiscal deficit of 6.1% of GDP this year to something nearer the eurozone’s 3% annual target by 2029. But Mr. Barnier mostly tinkered around the edges with adjustments to inflation-indexation of pensions and the like. Some of his proposed tax increases, such as on electricity, couldn’t survive the National Assembly, while many others (including wealth and corporate taxes that may be more popular) would be awful for economic growth.
Which, as ever, is the real crisis. Economic growth has underperformed for years and unemployment remains persistently high. Mr. Macron’s reform agenda, especially concerning labor laws, helped for a time. Then the pandemic hit, and France never quite recovered. This is becoming more noticeable amid potential trade wars between the European Union and China and the U.S., and as Germany also sputters.
Many investors and the media-Brussels industrial complex fret that the budget bust-up will empower Marine Le Pen of the insurgent-right National Rally, or the various unsavory leftist politicians who make up the New Popular Front—none of whom care about EU fiscal strictures. But that already happened when those parties gained in the election. The budget fiasco is a symptom of France’s political crisis, which is an outgrowth of its economic malaise. EU fiscal rules did little to help any of this even when Paris pretended to follow them.
Will this mess explode into a eurozone crisis akin to the disasters of 2010? Volatility is dangerous in such an unhealthy economy when any number of things can break suddenly. It doesn’t help that this is happening at the center of the eurozone rather than edges such as Greece, Ireland, Portugal and Spain.
The fix, as in those countries, would be an agenda that gets the economy growing again. No one in Paris seems to have such ideas, and that’s the biggest crisis of all.
