France on the Brink: Debt Crisis and Political Instability Threaten Future

France: A Debt Crisis Threatening Political and Economic Stability

In the heart of Europe, France is grappling with an escalating debt crisis and political instability that threatens the nation's future. Unlike Italy, which often receives the spotlight for its debt, France finds itself in a similar, if not worse, situation, with rising borrowing costs and governments collapsing in a matter of months.

If French Prime Minister Borne loses the no-confidence vote on September 8 over her efforts to curb the national budget deficit by €44 billion, she will become the fourth head of government to lose their job in a year and a half. High turnover in the prime minister's office was once rare in France, a cornerstone European nation whose political system is designed to foster stable governance. However, in recent years, France has entered a vicious cycle: worsening public finances are exacerbating political fragmentation, which in turn is hindering the nation's ability to make tough choices about how to fix its fiscal mess.

Borne is widely expected not to survive the no-confidence vote, which would force President Macron to appoint a new prime minister to form the next government. But Borne last week urged lawmakers to unite behind her, calling it "a matter of life and death for our nation."

The more ungovernable France appears to become, the more investors are pushing up its borrowing costs to levels familiar to debt-laden European nations. Currently, France's 10-year bond yield has surpassed that of Greece, and its borrowing rates are nearing those of Italy.

Structural and Political Challenges

Extricating France from this spiral is difficult because its National Assembly, the lower house of parliament, is splintered into multiple factions, each with conflicting fiscal priorities and enough votes to shift the balance of power. A host of left-wing parties do not want any cuts to the French welfare state, which accounts for 65% of public spending. Centrist lawmakers aligned with Borne and Macron, along with a contingent of establishment conservatives, want to increase military spending to counter Russia without raising taxes. Meanwhile, far-right lawmakers like Le Pen say the government should cut spending by limiting immigration and payments to the EU.

Macron's Economic Legacy

Macron, after first being elected in 2017, rolled out comprehensive tax cuts but did not make similar cuts to the costs of France's health care, education, and other public services, laying the groundwork for the current predicament. He abolished the wealth tax and housing tax, lowered the corporate tax, and imposed a flat tax rate on capital gains. These combined measures mean that by 2023, France was deprived of €62 billion in tax revenue annually, equivalent to 2.2% of GDP.

The tax cuts helped France become one of Europe's most attractive destinations for foreign investment, and the unemployment rate fell to 7%, a decades-low. Economic growth initially rebounded, helping to fund the tax measures, but a series of crises then hit. The violent “Yellow Vest” protest movement swept the country, prompting Macron to spend €17 billion to appease protesters.

Xavier Timbeau, an economist at OFCE, a state-funded economic observatory in Paris, said Macron’s policies created an extreme “feeling of injustice,” and were seen as aimed at cutting taxes for the rich and businesses.

The Impact of COVID and the War in Ukraine

Measures to cushion the blow from the COVID pandemic also cost €418 billion. Then, the outbreak of the Russia-Ukraine conflict led to a surge in energy prices, to which Macron responded with €26 billion in energy subsidies.

By then, France was in deep trouble. Debt had risen from €2.2 trillion before Macron was elected to €3.3 trillion, and economic growth had stalled. Macron refused to raise taxes and struggled to cut welfare spending. He succeeded in raising the retirement age to 64 by 2030, projected to save €17.7 billion that year, but only after a bitter fight with the opposition and widespread protests.

Budget Revisions and Downgrades

Last year, France was forced to make a series of embarrassing revisions to its budget deficit. The national statistics agency widened France’s 2023 deficit to 5.5% of economic output, whereas the government had forecast 4.9%. Weeks later, the government had to revise its forecast for the 2024 deficit, raising it from 4.4% of economic output to 5.1%. Ratings agency Standard & Poor’s responded by downgrading France. Conservative lawmakers threatened to help topple the government if it didn’t make more effort to curb spending.

A Political Gamble

One of the most significant moves of Macron's term was preempting parliamentary struggles, dissolving parliament and calling snap elections, but this led to an unprecedented splintering of votes in the National Assembly. Without a clear majority, any piece of legislation, including the annual budget, became a referendum on the government.

Barnier, the conservative Macron chose as his first prime minister after the election, soon fell in a no-confidence vote. Borne took over at the end of December and succeeded in passing a late 2025 budget by temporarily raising the corporate tax.

He soon began warning parliament that paring back the projected 2025 deficit, expected to reach 5.4% of GDP this year, would require deeper sacrifices. After failing to negotiate changes to Macron’s pension system reforms, he lost the backing of the Socialist party.

Then, Borne angered the country with a plan to increase economic output by eliminating two national holidays—Easter Monday and May 8, the day France celebrates Nazi Germany's surrender to Allied forces.

Jordan, the leader of the far-right National Rally, dismissed the idea as “a direct attack on our history, our roots—on the French who work.”

Looking Ahead

France faces significant challenges in addressing its debt crisis and political instability. The country needs to find a way to reduce its budget deficit and improve economic growth. However, political divisions are making it difficult for the government to make the tough decisions needed to achieve these goals. France's future is uncertain, and it will depend on the ability of political leaders to find common ground and work together for the national interest.