“Reality is catching up with us,” French Prime Minister Sébastien Lecornu warned this week on the eve of presenting the 2027 budget. Lecornu was referring to this year’s surge in government borrowing costs which aggravates France’s fiscal woes just as it enters the presidential election campaign. Amid a broader debt market sell-off, France has become a focal point of investor jitters about debt sustainability.
France’s debt-to-GDP ratio now stands at 119 per cent. Its 10-year bond yields this week climbed above 4.9 per cent, the highest in the Eurozone, from 3.6 per cent in early July. The premium that Paris must pay compared with German debt has risen sharply to more than 125 basis points, the highest level since the peak of the Eurozone crisis in 2012. A country that has not run a budget surplus since 1974 is now paying dearly for its profligacy.
The draft budget would make total savings of €54bn next year, including €43bn of new measures, in a mixture of tax rises and spending cuts. That should be enough to trim the deficit from 5.4 per cent to 5 per cent, a target France was supposed to hit in 2026 but, as in so many previous years, has missed. Lecornu’s minority government could push the budget through by decree, at the risk of being toppled in a censure vote, but the plan will soon be overtaken by next spring’s presidential vote.
Investors are paying less attention to a temporary fix at the tail-end of Emmanuel Macron’s presidency and more to the political and fiscal developments that follow. They don’t like what they see. The first concern is the structural deterioration in the public finances. On current policies, the deficit would hit 6.8 per cent by 2030, according to a government-appointed commission, as spending is driven up by population ageing and rising interest costs. Debt servicing would eat up €124bn in 2030, the commission estimated, 60 per cent more than France’s defence spending.
Source: Financial Times Markets · Summarized by HeadlinesBriefing