French economy in a death spiral
IT is the season for announcing results for 2023. On a national level, many countries have published gross domestic product (GDP) growth data for last year. Fiscal results are also trickling in from other countries including France — the second-largest economy on the European continent and in the eurozone.
The result is not final and outspoken but apparently so disappointing that it has to be sneaked into the media. It’s an old trick to use when the reality is too bad to publish. Sluggish news has circulated for some days now — apparently, French Finance Minister Bruno Le Maire mentioned the dramatic budget deficit in the French newspaper Le Monde on Wednesday, March 6.
The deficit target for 2023 was to bring it down to 4.9 percent of GDP. According to the finance minister, the deficit will overshoot the target significantly. It can, for example, produce a huge deficit if something extraordinary hits a country.
This is unfortunately not the case in France. It instead has a decadeslong budget deficit, which has created a structural debt problem. Government debt is at 110 percent of GDP, which is alarming and much worse than in many emerging countries. Under such circumstances, a deficit like Le Maire indicated is an outright catastrophe.
As mentioned, France has over the past 30 years maneuvered itself into a very bad economic position and there is no escape now. Ten to 15 years ago, leading French politicians argued that France was a great export nation and that they would bring this quality further forward. The only action taken was to increase the internal pressure in the eurozone to let the euro slide, thereby helping exporting companies. Devaluation is not a sustainable solution; the attempt, by the way, didn’t succeed for France in any outspoken way.
It’s tough to say that various governments in France since then haven’t done any reform work, but it is actually what I would claim is the case. One reason is that what is announced as a reform in reality is nothing more than adjustments.
What happened last year is a good example, and at the same time noteworthy, when assessing the outlook for the next 12 to 24 months. French President Emmanuel Macron got a “pension reform” voted through. The change was to increase the retirement age from 62 to 64. This caused so much social unrest in France that it was the main reason for the rating agency Fitch to lower the country’s long-term credit rating from AA to AA-. So
what is there to expect now?
Le Maire shared some insight about this subject as well. Running a budget deficit like how France currently does is equal to conducting very expansive fiscal policy. His obvious solution is to reduce public spending, with the explanation “that France has to cool the machine at some time.”
It’s unclear if he means the “spending machine” or the economy in general. If it’s the overall French economy that the finance minister is referring to, then if it wasn’t under these grave circumstances, I would call it good humor.
The French economy grew 0.9 percent last year with lower growth toward the end of the year. This indicates an even lower growth this year and is still based on way too high subsidizing via fiscal spending.
France is forced to cut public spending and this will happen in a close to zero growth environment. My primary scenario is that these initiatives will not be enough to prevent France from being downgraded by ratings agencies again. Further, I expect the budget cost to bring people back to the streets, protesting heavily like last year.
The biggest challenge is that the expected budget cuts are, again, just small adjustments compared to what is needed. The necessary and big reforms include severe public spending cuts, a significant reduction in the number of people employed in the public sector and an increase in the working hours per week for all employees.
Such initiatives will get the whole of France to protest, but these are examples of true reforms. When it comes, it won’t create a lot of sunshine as more than 10 percent of the population in France already lives in what is considered as poverty. Currently, there are no signs of introducing true economic reforms in France, and therefore I see no reason to change my long-standing assessment, which is to underweight investments in France.