Bond rating vigilantes are targeting Paris and Rome instead of the UK

Britain took its punishment early but fiscal largesse has flattered France’s growth since the pandemic

‘The Bank of England will soon be slashing rates and the interest cost on Treasury debt will fall’

The wheel of economic fortune in Europe is turning. Britain is no longer the default poster-child of everything going wrong at once. Rating vigilantes are switching their sights to the spending excesses of Emmanuel Macron, once the acclaimed Mozart de la finance but now facing the prospect of a parliamentary inquiry and a vote of censure on charges of fiscal ruination. They will soon take a closer look at Italy too as the fallout from a subsidised construction bubble becomes clear. The Italian growth “miracle” of the past two years is the mechanical consequence of a “superbonus”

for fixing up homes – including eight private castles – that is expected to cost the taxpayer almost €200bn (£171bn) when the damage is revealed this week. The budget deficit for 2023 may ultimately hit 10pc of GDP. If that cannot buy you a false boom, nothing can.

“The king has been naked for a long while. Expect nasty surprises and a substantial deterioration in the debt ratio due to runaway spending,” said Lorenzo Codogno, from LC Macro.

Scope Ratings says Italy could become ineligible for bond purchases under the European Central Bank’s spread control tool (TPI). That in turn brings Italian solvency back into focus. Meloni mania is over.

It is churlish to pick on Macron on the 120th anniversary of the Entente Cordiale, as he lavishes warm words on Britain and buries the Brexit hatchet. The Garde Républicaine took part in the Changing of the Guard on Monday.

Nor should one underestimate the deep economic and strategic strengths of France. To do that would be the mirror reflex of those prone to catastrophising about everything in post-referendum Britain.

Yet fiscal largesse has clearly flattered France’s economic growth since the pandemic – just as Joe Biden’s megadeficits have flattered US growth. Not much of the borrowing has been used for public investment with a high economic multiplier. It has mostly been “bad” transfer debt rather than “good” productive debt.

The Cour des Comptes says Macron has allowed a careless degradation of the public finances, and will now face a reckoning. “The budget for 2025 is going to be the most brutal since the financial crisis,” it said.

Both France and Italy face the long grind of retrenchment, again governed by the EU stability pact. It is bad enough to endure your own austerity, it is worse yet to have it imposed by Ordoliberal budget commissars in Brussels.

Britain will also have to retrench but it will do so under its own institutions. Fitch Ratings upgraded the UK’S sovereign debt to AA- in March, lifting the negative outlook imposed after the

Truss accident in 2022. They waited too long. The striking feature of that episode is how skilfully the Bank of England contained the damage, and how quickly Britain’s political machinery restored order.

Fitch’s argument is not just that the UK’S budget deficit is on a downward glidepath but also that the country still scores well on the World Bank governance indicators, covering regulatory quality, rule of law, corruption, stability and even “government effectiveness” – believe it or not.

Last week, Allianz Trade upgraded the British car industry, citing the “overall improving outlook for country risk”. An earlier Brand Finance report based on 170,000 respondents worldwide raised the UK’S 2023 ranking by several notches, both for a “strong and stable economy” and for being “well governed”.

Perceptions of France are moving in the opposite direction. Fitch kicked off the downgrades last year, cutting from AA to AA-. The rating is now the same as the UK but deteriorating rather than improving. In fairness to Macron, you have to scatter money at times as a lubricant while you push through radical change. But he became addicted to the easy response of quoi qu’il en coûte, or whatever it takes.

He held down energy prices for rich and poor alike during Putin’s energy war, suppressing the price signal rather than forcing demand destruction. He subsidised petrol. He bought off the gilets jaunes. He bought off the farmers. He prime pumped the last election.

What remains is the debt, stuck at 111pc of GDP, while Germany’s debt is down to 64pc and falling rapidly. This is an untenable divergence for the two economic pillars of the same currency bloc. No wonder Germany is resisting any form of permanent fiscal union or shared debts, and without fiscal union the euro remains a half-formed project. Seven years into his presidency, Macron has done just enough to provoke a populist whirlwind, and prepare the ground for a Le Pen presidency, but not enough to lift the trend growth rate of the French economy to Premier League levels.

Britain has its own deep problems, as we all know, but the “second derivative” is turning upwards, as they say in hedge fund land. The PMI surveys of the economy are defiantly resilient. Pantheon Macroeconomics forecasts that inflation will be 1.7pc this quarter and next, at which point it will undercut the eurozone and boost real wages. The Bank of England will soon be slashing rates. The interest cost on Treasury debt will fall, promising a virtuous circle for the public accounts.

Personally, I do not agree with Rishi Sunak’s economic policy. It is a grave misreading of Britain’s structural woes to run down public investment. But he has at least restored economic calm.

Britain took its punishment early: a reward of sorts is now coming. Sunak deserves more credit than he receives.