France, like the United States, faces a mounting debt crisis. Public debt outstanding is now around 114% of France’s GDP. In the United States the ratio is about 100%. Curiously, sovereign borrowing costs for France are substantially lower than interest payments for the U.S.
France is a member of the European Union, the EU. The rules of the EU state that France’s debt to GDP ratio should be below 60% of GDP. Moreover, the fiscal deficit in any one year is not to exceed 3% of GDP. This year, France’s fiscal deficit will be around 5.8% of GDP. France is in clear violation of EU rules.
The most recent attempt to put France’s finances in order failed. On Monday, the French Parliament, in a vote of no confidence, rejected the plan of then Prime Minister Francois Bayrou to address France’s intractable deficit problem. Bayrou had proposed that welfare payments be frozen and that two public holidays be eliminated. But the French Parliament, in a vote of 364-194, said “no” to the plan, which would have reduced the fiscal deficit from almost 6% of GDP to around 4.6% of GDP, still far above the 3% limit of the E.U. Given the no confidence vote, the government of Bayrou fell after just 9 months in office. Now France has lost 2 Prime Ministers in less than a year. Last December. Michel Barnier was also thrown out of office in a vote of no confidence. He too was trying to fix France’s finances.
France is plagued by political paralysis, a deepening deficit problem, slow economic growth and falling productivity growth.
With all of these problems, an outside observer might think that the interest rates on the sovereign debt of France would be exploding. Yes, yields on French debt have increased and the spread, the difference between German sovereign debt and French sovereign debt is the widest since January. That said, the interest cost on the French benchmark debt instrument, its 10 year bond, is still only about 3.48%. By contrast the yield on the 10 year U.S. Treasury note is about 4.08%.
The U.S. does have a deficit problem, but nowhere near as severe as that of France, and the U.S. enjoys relatively strong economic growth with the promise of rising productivity growth because of the Artificial Intelligence Revolution. So how can France’s borrowing costs be so much lower than the U.S.? The short answer is that the European Central Bank effectively guarantees the sovereign debt of France. Investors know that the E.C.B. will ensure that France does not default.
From the standpoint of basic economics, this is a strange situation. Investors have more confidence in the E.C.B. and the economies of the countries of the EU than they have in the U.S. Treasury and the economy of the U.S.. This is perverse but true. But as market participants say, “you can’t fight the tape.” But it does raise the question of how France will fix its deficit. There is no clear answer to this problem. The people of France do not want to make the sacrifices necessary to reduce government spending, which now accounts for 57% of GDP. French society likes the cradle-to-grave security of the French social welfare system. Moreover, the majority of voters in France seemingly accept that taxes take over 50% of GDP. The U.S. total tax take is about 30% of GDP.
JEFFREY EPSTEIN 50TH BIRTHDAY BOOK WITH TRUMP NOTE TURNED OVER TO HOUSE OVERSIGHT COMMITTEE
Apparently, the French don’t understand that when taxes are that high, strong economic growth becomes impossible. The public sector strangles the more productive private sector. Bizarrely, the only solution mentioned by French policy experts is to raise taxes even higher on the most productive members of the economy. These experts don’t understand that people respond to incentives and disincentives. Too high taxes are a disincentive to hard work and innovation.
As long as France has the backstop of the E.C.B., it will muddle through its deficit problem. But in the meantime, the people of France will economically fall farther and farther behind the people of the U.S.. It is not by chance that per capita income in France is lower than the per capita income of residents of Mississippi, the poorest of the American states.
