Leave with your head held high and your conscience clear. Until the last moments, Bruno Le Maire tried to impose his solution to successfully carry out the perilous mission he had made his own: restoring public finances, the decline of which has only worsened under the presidency of Emmanuel Macron. In vain. While the Minister of the Economy, with the record for longevity, had put on the table a reduction in spending of 5 billion euros for the 2025 budget, Gabriel Attal decided otherwise. The Prime Minister preferred caution to aplomb, by proposing to freeze state credits.
A way of not committing the next executive, which will be responsible for taking up or not this draft finance bill with its confusing neutrality. The version made in Matignon should in any case allow for savings of 10 billion euros considering that inflation would be 2% next year. “The current government is obliged to propose a minimal budget without knowing what the next parliamentary majority will want. It is very difficult for it to take a political initiative, which would go beyond the framework of current affairs”, underlines Eric Dor, director of economic studies at Iéseg.
Framework letters have been sent to all ministries with a view to tightening belts. The details will have to come back later. Matignon only specifies that the credits allocated to culture, sport and the military will not change. However, the head of state had stated on the eve of July 14 that an “adjustment” of the programming law would be necessary in 2025. What will happen to the “up to 3 billion euros” of additional aid that he announced last March, as part of a security cooperation agreement signed in the presence of Volodymyr Zelensky in Paris? No answer at this stage.
The pill doesn’t go down well at Bercy
Despite the limited efforts made, Gabriel Attal’s teams are not giving up: “The Prime Minister is concerned about restoring public finances. It is quite rare to have a ‘zero value’ budget.” On the Bercy side, this snub is not taken well. “We would have done better to stay on vacation, sighs an advisor to the minister. Bruno Le Maire is a bit alone in trying to straighten out the accounts.” A few months ago, at the beginning of March, the government’s number 2 in protocol order went before the Finance Committees of the National Assembly and the Senate. With a closed face, he tried, as best he could, to defend the 10 billion euro savings plan enacted by decree two weeks earlier. A necessary cutback plan to prevent the 2024 budget from slipping, following a much too optimistic growth forecast from the Bercy teams. Alas. This was only the beginning. At his side, the Minister Delegate for Public Accounts, Thomas Cazenave, then took charge of announcing the next bad news: an additional 20 billion euros will have to be found in 2025 “in order to respect the trajectory aimed at containing the deficit below 3% by 2027”.
This threshold, set in stone in Protocol No. 12 of the Maastricht Treaty, remains a priority objective and considered plausible by Emmanuel Macron and the outgoing government. In the 2024-2027 stability programme sent to Brussels, the executive is counting on reducing the public deficit to 4.1% in 2025 – against the 5.1% targeted in 2024 – before returning to below 3% in 2027. A trajectory whose credibility has been seriously damaged by the High Council of Public Finances and by many economists. “We do not believe that this objective is achievable given current policies”, also judges Hannah Dimpker, head of France’s rating at Fitch, an agency which last April maintained the French debt rating at AA-.
So, without the 20 billion euros in savings promised last March, but with only half, if the successors of Gabriel Attal and Bruno Le Maire take up the budget proposal as is, the recovery of French public finances seems to be off to a bad start. “It is still a responsible start given the political uncertainty that reigns in France,” tempers economist Zsolt Darvas, researcher at the Bruegel Institute in Brussels. But it will not be enough.” With concrete consequences for the future. “Any procrastination will aggravate the effort to be made in the coming years,” warns Eric Dor. Candidate for the post of Prime Minister on behalf of the New Popular Front, Lucie Castets has already announced, in Release, that she would not follow up on Matignon’s proposal, opting instead for a major investment plan and tax measures targeting the “ultra-rich”. “Pursuing an austerity policy in the current context seems to me to be inappropriate and irresponsible,” she maintains.
Dialogue favoured by Brussels
In Brussels, the situation is obviously being followed very closely. While waiting for the appointment of the next government, “the official position is: there is no concern. The general state of mind is to be in dialogue and not to send a reminder”, assures a source within the European Commission. The timetable is nevertheless tight. As part of the recent reform of the Stability and Growth Pact, France, like all the other states of the European Union, must submit, by September 20, a budget plan for the next four or seven years, including the year 2025. “Given the size of its public deficit and its debt, it will probably be seven years”, continues this source. Each member state will have to present reforms and investment programs with a view to stimulating growth. It is up to the future French government to show its credentials. “The France 2030 plan [NDLR : un programme d’investissement de 54 milliards d’euros dans l’industrie, la transition écologique ou encore les nouvelles technologies] “could already serve as a good basis,” whispers the entourage of the European Commissioner for the Economy, Paolo Gentiloni.
In all likelihood, France will be among the group of latecomers. In the current situation, “it is difficult to imagine that it will be able to submit the document before September 20,” believes Andreas Eisl, a researcher in European economic policy at the Jacques Delors Institute. This shortcoming should be put into perspective. “It will not be the only country not to be able to produce such a plan on time. This will also be the case for Austria, where there are elections, and Bulgaria, which is currently going through a political crisis,” he continues. Within the Commission, they advocate pedagogy: “It is normal that in an election year there are delays. The longer it takes to appoint a new government, the tighter the deadlines will be.” Once the new projection of the accounts has been received, Brussels will be able to make recommendations if the plan is not considered satisfactory. “There will be room for negotiation. We know this debate about the speed at which the budget should be adjusted without harming growth. It is a rather fragile balance,” recognizes those close to Paolo Gentiloni.
The Sword of Damocles of the Excessive Deficit Procedure
A new exercise that took on singular importance when the European Council officially launched, at the end of July, an excessive deficit procedure against France, Italy, Belgium, Hungary, Poland, Slovakia and Malta. If measures are not taken in the coming years, these countries risk financial sanctions. For the French State, these could be in the order of 2.5 billion euros per year, or 0.1% of GDP. A cost that our public finances could not bear. “A radical change of course that would consist of not respecting European budgetary rules would be an affront towards our European partners and a renunciation of our future generations,” warns MEP Stéphanie Yon-Courtin (Ensemble). But, in the past, France has already found itself subject to such a procedure from 2003 to 2007, then from 2009 to 2017 without any fine being imposed. “Brussels has been urging France to reduce its deficit for twenty years. It’s a rather petty game of cat and mouse. When Brussels turns a big eye, everyone knows that there will be no sanction in the end,” assures Sylvain Bersinger, chief economist at Asterès.
Nevertheless, France is among the worst performers in the eurozone in terms of debt (110.6% of GDP in 2023) and public deficit (5.5%). “When we created the single currency, we made commitments. We had to create a co-ownership regulation to maintain confidence in the European currency. Most of our partners have respected their commitments. In application of our obligations, every year we submit a stability programme, which France has never respected. Without the euro, how could we have faced the Covid-19 pandemic?” wonders former MEP and Finance Minister Jean Arthuis.
Beyond hypothetical sanctions, it is the future of Europe that is at stake, at a time when decisive measures must be taken to ensure the energy and digital transitions. “With Emmanuel Macron, we had a very pro-European government. If on the economic level France, the usual driving force of the EU, does not respect the terms of the contract in terms of public finances, this compromises its credibility”, judges Andreas Eisl of Bruegel. “We have a duty to set an example as a founding member of the European Union. It will become very complicated to ask for efforts and advance political projects if we do not comply”, adds Christopher Dembik, investment strategy advisor at Pictet AM.
Markets’ patience may not last
The wrath of the European Commission will not be the only worry of the future government, if investors turn away from French debt. So far, the markets have remained rather expectant. After the dissolution, the spread – the interest rate gap – between France and Germany has increased by 0.25%. “This is nothing compared to real sovereign debt crises like the one Greece experienced,” says economist Eric Dor. “The absence of a government is not inherently problematic. In 2011, Belgium did not have one for over a year. This is nothing new for the markets, they know how to manage this type of situation,” adds Christopher Dembik.
But the status quo may not last. “We are seeing some negative signals on French debt rates. Creditors are starting to lose patience. If investors become more cautious about France, rates will be higher, and they will have to pay on the nail. Lenders are starting to say: ‘Rates are already higher in France than in Portugal’, a country that, ten years ago, was virtually bankrupt,” notes Sylvain Bersinger of Asterès. And if rates increase, the interest burden also increases. And with a debt of more than 3,000 billion euros, France cannot afford it.
The composition of the future government and the colour of the 2025 budget will be decisive. “We must not play with fire by testing investors’ patience for too long. France has a series of assets: the high liquidity of its debt, the diversification of its economy… Nevertheless, a very calm market can suddenly change its perception”, recalls Eric Dor. The Liz Truss case law bears witness to this. In September 2022, the new British Prime Minister unveiled a 150 billion pound plan to counter the surge in energy prices. Taken by surprise, the markets reacted very quickly with a sudden increase in interest rates. 44 days after her arrival, the leader of the Conservative Party resigned. “What happened in the United Kingdom could also happen in France in the event of a very unrealistic budget proposal”, says Zsolt Darvas, who particularly targets the expensive programme of the New Popular Front. At the risk of leading to austerity, the real kind, not the one imagined by Lucie Castets.
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