While the President of the Republic is campaigning for a new major European loan with a view to financing, in particular, the rearmament of the continent, France’s inability to present a credible trajectory for its public finances in the medium term weighs down this proposal. The rating agencies have not yet sanctioned France… but it is the Commission which could do so. The analysis by economist Shahin Vallée, researcher at the Deutsche Gesellschaft für Auswärtige Politik (German Council on Foreign Relations, a research institute) and former advisor to the President of the European Council, Herman Von Rompuy.
L’Express: While awaiting the decision of the latest rating agency, S&P, concerning the quality of French debt at the end of May, more and more economists are questioning the budgetary trajectory sent to Brussels, judging it to be little credible or even insincere. Is the situation dangerous?
Shahin Valley: For the moment, there are no tensions on the bond markets which would really call into question the financing of the French debt and its cost. In short, there is no absolute urgency. The fact remains that the French budgetary situation is unique compared to that of other European countries. It is characterized both by very high levels of debt and deficit, but above all by the absence of real prospects for consolidation. Indeed, the budgetary roadmap sent to Brussels does not specify any paths for recovery in the medium term. The real concern is there.
If the sanction does not come from the rating agencies or the financial markets, can it come from the Brussels Commission?
That’s almost certain! Although we voted for an adaptation of the budgetary rules in Europe, this does not change the fact that France, a priori, will be put under excessive deficit procedure after the European elections in June. Quite simply because the French public deficit remains above 3% of GDP.
The European Commission will therefore order France to carry out a budgetary adjustment over several years which will be relatively significant, in principle of the order of 0.5 points of GDP each year. This represents around twenty billion euros of cuts per year in spending, in a permanent and, above all, sustainable manner. A historic effort!
This is not the first time that the Commission has criticized France, without any real effect. Why worry about it now?
This is the criticism that is often leveled at European budgetary rules: sanctions are never really implemented. It’s true, it’s a weakness. But these rules still play a role. They serve as a bit of a sea anchor and also sometimes as warning mechanisms, both for rating agencies and for financial markets. Above all, I think that the decision of the European Commission in June will have a real political cost for France.
France’s budgetary credibility is already largely damaged in Europe…
France will be able to choose not to respect the injunctions from Brussels but it will pay a certain price at the European level. On its ability to move the lines, to be listened to on other issues. I make the link with Emmanuel Macron’s recent speech on Europe in which he calls for a major European investment plan, an increase in the European Union budget, a new resilience fund or a new defense funds… All these initiatives will have difficulty progressing if France is perceived as the bad budgetary student of the European Union.
New budgetary rules that are a little more flexible and less complicated than the previous ones were voted by the member states a few months ago. Is this real progress?
The negotiation resulted in a rather disappointing framework. The three major weaknesses of the previous rules were that they were too complex, not sufficiently counter-cyclical and did not sufficiently protect public investment. We could hope that this new framework would respond fairly well to these three criticisms. In fact, what was voted on and comes into force today is ultimately much more complex. In terms of simplification, we have made no progress, we have even gone backwards. In terms of countercyclicality, the Member States have agreed on a criterion for monitoring the evolution of expenditure. Except that this framework does not work when a country enters the excessive deficit procedure and the old rules apply.
Finally, as for the last criticism, we have also made very little progress there. The only slight flexibility allowed concerns public investments co-financed with the European Union. This new budgetary framework that took us almost two years to negotiate does not constitute an improvement, and that is quite regrettable. France was not able to negotiate better or, noting that it could still be improved, to block its adoption while waiting for better. It is a collective failure.
The government should present a amending finance bill after the European elections. How long will the government be able to keep its promise not to increase taxes?
It seems difficult to me not to increase taxes and, at the same time, not to cut so-called protected expenditure items, such as pensions, the police, justice, or education. national… I think on the contrary that we must have a rather open and taboo-free approach, both on revenue and on expenditure, and find political combinations which make it possible to carry out an adjustment which would be as least recessive as possible and anti- redistributive possible.
What avenues do you suggest?
I was one of those who said in 2017 that abandoning the ISF was a mistake. So, I maintain that the taxation of assets in France is an option. Let’s debate it: should we impose the flow, the stock, the transmission of heritage? Several avenues are possible. But I think that we should not refrain from taxing financial assets, especially when we have seen the explosion of financial wealth in recent years.
On corporate taxation, there is a little leeway too, because corporate taxation is burdened by lots of tax loopholes whose effectiveness, in my opinion, is questionable. In particular, the research tax credit which is not only used to finance innovative research. It is also used to finance fairly basic investments, such as computer equipment, in companies which do not necessarily need to benefit from this tax credit.
And on the spending front?
When we talk about spending, we cannot avoid a debate on pensions. Today, retirees have median incomes higher than those of working people and these incomes are better indexed to inflation. This means that inequalities between retirees and workers are widening. We can save a lot of money by under-indexing the highest pensions and maintaining an automatic increase for the lowest pensions. We can’t forbid ourselves!
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