A Nation in Debt: Unpacking the French Fiscal Crisis
3,228.4 billion euros. That’s the astronomical figure representing France‘s debt in the second quarter of 2024. Equivalent to 112% of its gross domestic product (GDP), this puts France high on the list of indebted European nations, trailing only Greece (163.6%) and Italy (137%). The problem isn’t just the current figure, but the trajectory: in 1995, our debt stood at a mere 57.8% of GDP. What led to this troubling upward trend?
“Regardless of ideology, I think we can recognize that politicians have been incapable of properly managing our French public finances,” observes Christopher Dembik, investment strategy advisor at Pictet AM, a Swiss bank. He’s not wrong. Both the left and right have shown a concerning laxity regarding our public accounts. When it comes to spending, governments have been quick to sign checks, often avoiding difficult reforms that could have brought our finances under control.
The French have a tendency to cry “austerity” at the slightest hint of reduced spending, demanding ever more public services and expecting the State to solve every problem. This desire for an ever-expanding social safety net, built during the prosperous Trente Glorieuses era, has been constantly undermined by weakening economic growth.
Is the Blame on Crises?
Pension reform is perhaps the most glaring example of our fiscal mismanagement. When François Mitterrand raised the legal retirement age from 65 to 60 in 1981, the decline in the birth rate was already underway. His successors, while making some attempts at reform, essentially dodged the issue, leaving this demographic time bomb ticking for future generations.
On the tax front, strategies have swung from the “bludgeoning” tactic – exemplified by François Hollande’s fiscal shock, which risked stifling growth – to lowering them as Nicolas Sarkozy and Emmanuel Macron did, hoping that revived growth would compensate for the shortfall.
Crises, such as the subprime mortgage meltdown and the Covid-19 pandemic, undoubtedly play a role. Economically, letting deficits slip during difficult times is often justified to prevent a downward spiral. However, France seems trapped in what economists call the ratchet effect: we struggle to decrease our debt once the crisis passes.
The Alluring Trap of Low Interest Rates
Easier access to financial markets and the shield of the eurozone, which allowed us to lower our interest rates, contributed to our growing debt. In recent years, the monetary policy of the European Central Bank (ECB) further reduced the burden: interest rates fell, and in some cases even dipped into negative territory – a historical anomaly where creditors paid to lend to eurozone states.
ALSO READ Debt: a French scandal
To Discover
Kangaroo of the day
Answer
“It was an incredible phenomenon: the debt was increasing and yet the debt
What are the main long-term contributing factors to France’s national debt?
## A Nation in Debt: Unpacking the French Fiscal Crisis
**Host:** Welcome back to the show. Today we’re delving into a pressing issue facing France: the mounting national debt. With us to break down this complex topic is Christopher Dembik, investment strategy advisor at Pictet AM, a Swiss bank. Welcome, Christopher.
**Christopher Dembik:** Thank you for having me.
**Host:** So, Christopher, the numbers are staggering. France’s debt currently sits at over 3.2 trillion euros, translating to 112% of GDP. [[1](https://www.reuters.com/markets/europe/budget-woes-push-french-borrowing-costs-above-crisis-scarred-greece-2024-12-02/)]How did we get here?
**Christopher Dembik:** It’s a complex issue with no single cause. I think it’s fair to say that, regardless of political ideology, successive French governments have struggled to manage public finances responsibly. We’ve seen a pattern of lax spending and an aversion to difficult reforms, often driven by a public expectation of ever-expanding social services.
**Host:** You mention public expectations. Is the French public partly to blame for this predicament?
**Christopher Dembik:** It’s a delicate balance. The French social model, with its strong safety net, has been a source of pride and stability for generations. But it comes at a cost. The demand for more public services, while understandable, has strained public finances, particularly in the face of weakening economic growth.
**Host:** Pensions are often cited as a major contributing factor.
**Christopher Dembik:** Absolutely. The decision in 1981 to lower the retirement age to 60, while seemingly popular at the time, created a demographic time bomb. With a declining birth rate, it placed an unsustainable burden on future generations to fund pensions. This issue was recognized by subsequent governments, but decisive action was postponed, leaving us with the challenging situation we face today.
**Host:** Some argue that external factors, like global economic crises, share the blame. Is that a fair assessment?
**Christopher Dembik:** Global events undoubtedly play a role. Recessions and financial shocks impact every nation. However, France’s fiscal vulnerability stems from deep-seated structural issues within its economy.
**Host:** What’s the outlook? Can France get its debt under control?
**Christopher Dembik:**
The situation is serious, but not hopeless. Addressing this crisis requires a multifaceted approach: fiscal discipline, responsible spending cuts, targeted reforms, and potentially, an honest conversation with the public about the long-term sustainability of the current social model. [[1](https://www.reuters.com/markets/europe/budget-woes-push-french-borrowing-costs-above-crisis-scarred-greece-2024-12-02/) ]
**Host:** Thank you for your insightful analysis, Christopher.
**Christopher Dembik:** You’re welcome.
