Financial crises are often linked to a political crisis. On 8 September, the French government will submit itself to a vote of confidence – which, by all accounts, it will lose. At issue is France’s parlous financial state, which a minority French government seeks to address. This week, French 30-year bond yields reached levels unseen since the Greek debt crisis in 2011, while the 10-year yield has surpassed present-day Greece’s.
France’s economy minister was quick to warn that France’s lamentable financial position could leave it facing an IMF bailout. This was intended to frighten MPs ahead of the vote rather than reflect reality. Greece was borrowing at near 30 per cent prior to its debt crisis and had a budget deficit of 15 per cent GDP, while France’s is 6 per cent. Parallels with Greece in 2011 are exaggerated. Yet debt markets can turn at the blink of a logarithm.
If François Bayrou’s government falls, an optimistic outcome is unlikely
Were that to happen, the European Commission would never allow an outside body alone to take control of a Eurozone member. As with the Eurozone crisis a decade and a half ago, a new ‘Troika’ would be appointed: IMF, European Central Bank and European Commission. Thirteen years ago I happened to be a member of that Troika called in to propose wholesale reform of the Greek public sector as the corollary for massive loans. Witnessing firsthand France’s leading role and unforgiving manner in ‘Task force for Greece’, it was clear how France’s attitude did not endear it to the Greeks. Like the French, they express their anger openly and carry historical grudges.
Demonstrations and riots were not the only signs of Greek frustration and humiliation. ‘Task force for Greece’ was nominally led by France and Germany. But the Greeks ran a very effective press campaign showing how German reparations owed to Athens from the second world war equated to Greek debt. Germany’s delegate to the task force had his German home firebombed (whenever I caught sight of him, he was always flanked by armed detectives). Germany discreetly left the ‘dirty work’ to France.
The French team was run by senior members of the French Finance Ministry. They set about the task with technocratic zeal. My brief was to lead on reforming the Greek university sector (having served a few years previously on a French prime ministerial commission for French university reform). The Troika austerity reforms were truly harsh. Fierce cuts to public sector wages and pensions, tax increases, privatisation of state-owned enterprises and labour market deregulation resulted. My bit part was cut short by Greece’s refusal to implement any reforms not proposed and directed by itself. That became the norm. Greek passive (and not so passive) resistance to the Troika austerity reforms and the consequent political turmoil led to Greece directing the reforms itself.
France’s prominent role in the Troika austerity measures should be a salutary lesson given its own financial predicament. With a 6 per cent budget deficit and national debt to GDP ratio at 113 per cent (predicted to rise to over 120 per cent), France is already operating at twice the EU’s Stability and Growth Pact requirements. In November last year, the country was placed in excessive deficit procedure (EDP). As a result, under Article 126 of the Treaty on the Functioning of the European Union, France is required to provide six-monthly plans to the EU Commission on the corrective action, policies and deadlines it will apply to return to a 3 per cent deficit by 2029, failing which astronomical fines could be imposed.
There is little chance France can comply with the plan. A political crisis is likely on 8 September. If François Bayrou’s government falls, an optimistic outcome is unlikely. Three fateful scenarios present themselves. President Macron could appoint France’s fifth prime minister in two years. But who would want the poisoned chalice of applying austerity measures with no possible majority in the present National Assembly? The President could call new elections as he did in 2024. But opinion polls suggest another minority government, albeit clearly dominated by the Rassemblement National. A third scenario would be for President Macron to resign. That would lead to a new RN French president, by no means committed to austerity measures.
Each of these options will seriously frighten financial markets, not to mention the European Union. Given the way President Macron has antagonised so many European leaders over the last ten years, not to mention its role in the Greek debt crisis, France should be fearful she is not forced into the indelicate hands of the Commission. Which country’s officials would march into Paris? Heaven forfend that I be invited to take part in a Greek-led ‘Task force for France’.
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