High French public debt & political risks
A snap election seems likely to lead to a marked deterioration in an already difficult fiscal outlook for France.
The charts below show public debt in France over the very long run, compared with the USA, which has poor debt dynamics ahead of the critical presidential election in November, and Italy and Greece, the only two countries in the euro area with larger public debt burdens than France.
The IMF forecasts France’s public debt will increase from about 110% of GDP at present to around 115% over the next five years.
Public-sector forecasts are notoriously imprecise, but debt at that level would be a little higher than the peak reached during COVID, representing the highest ex-World War debt since the late 1800s, back when debt had rapidly expanded to fund the Franco-Prussian war and public works.
In terms of the French elections, where the first round of voting is on 29-30 June and the second round is on 6-7 July, the Institut Montaigne analysis of proposed spending policies from the various parties shows most of them aim to help low-income households with the cost of living.
Policy costings are also highly imprecise because of the limited detail on several of the proposals, where parties can also change their minds once in power.
However, the Institut’s analysis shows that current party platforms have expensive policies that would immediately add to the budget deficit, ranging between freezing many consumer prices (c.1% of GDP per annum), reindexing government pensions to inflation (c.½% of GDP per annum), and reducing the value-added tax rate (c.½% of GDP per annum).
The recent Italian experience shows that more extreme politicians can temper their plans once in government, but the base case seems to be adding to an already difficult fiscal outlook, including the potential unwinding of reforms to welfare payments, which explains the recent sharp increase in the premium of French over German debt.
Analysis suggests that a sustained increase in the risk premium for French debt will lead to lower French share prices, place downward pressure on short-term interest rates, and encourage demand to switch to UK bonds.
While increased public spending can add to growth in the near term, cross-country studies (weakly) suggest that debt levels of more than 100% of GDP end up being a drag on activity.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
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