France goes into debt without control: what consequences does this have for Germany?

Do we need the debt brake or not? Due to the poor economic outlook, economists advocate at least targeted investments through new debt. Meanwhile, politicians continue to insist on adhering to the debt brake. The tenor: The future should not be at the expense of the next generations.

In our neighboring country, France, everything is easier. There is no debt brake there. However, it is increasingly clear what a “deficit culture” can do. There also begins a debate about debt. At the end of March, the state statistics office INSEE announced that France's budget deficit had increased again, and significantly.

Only Greece and Italy have more debt than France

The conclusion is that 154 billion euros were missing from the budget for 2023, 5.5 percent of the gross domestic product. In 2022 it was significantly lower, at 4.8 percent, although the deficit for 2021 was even 6.6 percent. At the same time, government revenues slowed dramatically. Recently, according to the INSEE evaluation, they only grew by 2.0 percent, after 7.4 percent in 2022.

Things cannot continue like this for much longer, given the mountain of debt that France has already accumulated. In an EU comparison, only Greece and Italy are worse off, as Eurostat data shows. And: lately France has gone into more debt than other countries.

Of course, recent years have generally been characterized by debt. Covid, inflation and the energy price crisis, the war in Ukraine: there were enough reasons for governments to spend billions.

However, France's debt rose 12.5 percentage points between the third quarter of 2019 and the third quarter of 2023, three times faster than in Germany or Italy, and still a good three percentage points more than in Spain. With a debt ratio of 111.9 percent, France is now even ahead of its southwestern neighbor (109.8 percent).

And yet, the deficit is increasing again. According to the “Welt” newspaper, the country's media unanimously claimed that President Emmanuel Macron had “derailed” the budget, “as if the budget were a TGV high-speed train over which control could be lost.”

For decades, Paris has indulged in a “deficit culture.”

Macron's model minister, Bruno Le Maire, often insists that the state wants to reduce the budget deficit to less than 3.0 percent per year, as required by the Maastricht criteria. It is not clear how the Minister of Economy and Finance, Le Maire, wants to achieve this.

A problem here is the so-called “deficit culture.” Since 1974, no budget of the Elysée Palace has been balanced. Paris is very happy to respond to the population's recurring protests, the yellow vests, with gifts worth billions.

However, it is taboo to talk about higher taxes or even raising the retirement age to balance the state budget. It is enough to remember the anger with which the French protested when Macron mentioned an increase in the retirement age from 62 to 64 years. Macron achieved this reform with difficulty.

This relationship with debt, which is strange by German standards, runs across the political spectrum. The French left regularly calls for debt relief, while the right-wing populist Marine Le Pen enters the election campaign with the promise of lowering the retirement age again: to just 60 years!

It is becoming more and more expensive to borrow, even for States

However, Paris now has to save more. The same is stated by Le Maire himself, who was the only Macron minister who was never replaced, according to the newspaper Welt. He is also considered a candidate for the position of president. There will be another election in France in 2027.

Until then, Le Maire has a lot to do. However, the suggestions don't seem very effective. The minister asked government departments to save ten billion euros. A “seemingly ridiculous amount”, according to the newspaper Welt, taking into account the mountain of debt of 3 billion euros.

The amount seems even smaller considering how expensive borrowing has become. Due to record interest rate increases by the European Central Bank (ECB), states have to offer yields again in order to access the financial market. Consequently, the current yield on ten-year French government bonds has risen to more than 2.9 percent. At the beginning of 2022 it was still at zero.

Data from the French Treasury, Agence France Trésor, do not bode well in this regard. In 2019, before the pandemic, debt service cost the French State a good 40 billion euros, and in 2022 it was only about 36 billion euros. In 2022, interest and loan costs would already amount to €51.5 billion.

According to Die Welt, these costs could rise to 70 billion by the end of Macron's term, which would make them the third largest item in the budget after education and defense. One thing is clear: the money needed to pay the debt cannot be invested elsewhere.

How France's debt crisis is affecting the EU and Germany

After all, this does not only affect France: the EU's second largest economy depends on Macron's financial capacity to act and therefore also on joint tasks such as, for example, greater support for Ukraine. This is precisely why Macron campaigned for “defense bonds” in Brussels. “France cannot face this in any other way,” said the newspaper “Welt.”

And, of course, there would be consequences for Germany if France does not control its finances. For example, because our neighbor is not only an alliance partner, but also a good customer: according to the Federal Statistical Office, the Federal Republic exported goods to France worth 120.2 billion euros in 2023. Only the United States had more exports .

It remains to be seen whether France will finally learn something from Germany, the world champion in austerity. So far the situation does not seem dramatic enough, says French economist Charles Wyplosz to “Welt”: “When I talk about public debt as an urgent problem in Paris, everyone rolls their eyes. You don't worry about debts ”.