At the last Ecofin meeting in Brussels on Thursday 7 December, the European Ministers of Economy and Finance renewed their call for a relaxation of the rules on budgetary austerity. Anne-Sophie Alsif explains why, despite the difficult economic context, French debt remains sustainable
On 1 December 2023, the rating agency S&P decided to maintain France’s rating at “AA”. Nevertheless, the outlook is negative due to the high level of the budget deficit and debt. This “non-deterioration” is justified by the agency through the government’s consolidation program, which is considered “robust”, as well as because of the implementation of various structural reforms such as those of pensions or unemployment insurance. However, this “negative” outlook raises questions about the sustainability of French public debt in the longer term in view of the significant deterioration in public finances, particularly since the Covid-21 crisis.
France’s budgetary situation has indeed deteriorated particularly since 2019. Public debt increased from 97.4% of GDP in 2019 to 112.1% of GDP in 2023. Similarly, the government deficit increased from 2.1% of GDP in 2029 to 4.9% in 2023. This level of debt is higher than in many euro area countries. For example, public debt stands at 66.1% of GDP in Germany in 2023 and 92.2% of GDP in 2023 in the euro area. The level of French debt is therefore higher than the average for the countries in the zone. France is, in fact, far from respecting the Stability and Growth Pact recommending a debt level of 60% of GDP and a public deficit not exceeding 3% of GDP.
Individualized approach to reduction
The European Commission proposed to amend these fiscal rules on 26 April 2023. The ratios of 3% and 60% of GDP, enshrined in the treaties, are retained, but the stated aim is to move away from a one-size-fits-all approach for each Member State and to take into account the specific strengths and difficulties of the countries. Thus, for each Member State that fails to comply with one or other of the Maastricht criteria, the Commission will propose a four-year “reference budgetary path”, which can be extended by three years depending on the structural reforms developed.
Finally, France is also in primary deficit (-2.1% in 2019 to -3.3% in 2023) unlike other countries such as Italy traditionally in surplus: 1.6% of GDP in 2019. The country is expected to return to its primary surplus by 2025.
Protection against exogenous shocks
Nevertheless, despite this negative balance sheet, the French public debt remains sustainable because the country has various assets. France is located in the euro area which protects it from exogenous shocks. In the event of pressure on the debt burden, the European Central Bank can intervene, as was the case in 2010 during the sovereign debt crises. France could also benefit from the many structural adjustment mechanisms such as the European Stability Mechanism (ESM) in the event of a sustainability problem. In addition, the majority of French debt is held by French and Europeans. Finally, France’s collateral is important, such as the high level of the household savings rate (18% of GDI in 2023) and the strong capacity of the central government to raise taxes.
In an unstable world, France has a situation of economic and political stability that few countries experience. This situation reassures investors. Above all, despite this high level of debt, France is opting for economic growth. Massive spending cuts are often recessionary. In 2023, the country has one of the highest growth rates and is escaping recession unlike countries such as Germany. Thus, growing to reduce debt seems to be France’s economic policy choice.