In recent years, European finance ministers used to take solace in not being in Greece’s precarious fiscal position. Today, however, that sentiment may be shifting to France, as the EU’s second-largest economy faces significant economic challenges. On December 2nd, Greek bonds surpassed French ones in perceived safety, with their yield falling below that of France. The yield gap between French bonds and German bunds—the euro zone’s benchmark—has widened to 0.8 percentage points, the largest since the euro’s near-collapse in 2012. Matters worsened on December 4th when the French government disintegrated over disagreements on spending.
France’s mounting fiscal deficit is a primary concern. Estimated to exceed 6% of GDP this year—much higher than anticipated by both the government and independent forecasters—it is expected to remain above the European Commission’s 3% limit until the decade’s end, according to the IMF. Persistent deficits are pushing France’s debt to alarming levels, projected to hit 115% of GDP in 2024 and 124% by 2029. Consequently, interest payments on this debt will rise, potentially reaching 2.9% of GDP, assuming favorable economic growth. With Goldman Sachs revising France’s growth forecast to a mere 0.7% for next year, the strain on public finances could become even more severe.
France is not alone in its fiscal struggles. Traditionally frugal countries like Austria, Germany, and the Netherlands have also seen deficits balloon in the aftermath of the COVID-19 pandemic and the energy crisis following Russia’s invasion of Ukraine. Governments across Europe increased spending to support their economies during crises, stave off the rise of populist movements, and fund green initiatives and defense.
To address fiscal imbalances, EU countries have submitted plans to the European Commission. France’s plan aims to reduce its deficit by 0.5 percentage points of GDP annually, stabilizing debt levels. However, achieving this goal seems politically daunting amid growing resistance to austerity measures. France’s political challenges are mirrored in other member states. Germany’s coalition recently collapsed over spending disputes, and Italy is expected to face fiscal pressures in the coming years.
As the euro zone grapples with these issues, the challenges faced by France and others may become emblematic of a broader struggle to maintain fiscal discipline while addressing economic and social priorities.
