France could plunge the eurozone into its next crisis

In the French presidential elections, and now in the legislatives that will close on Sunday evening, the one issue kept under the carpet is finance. Neither the centrist Macronista grouping ‘Ensemble!’, nor the far-left Corbynista-like Nupes coalition of Jean-Luc Mélenchon has updated the electorate on how their manifestos are to be funded. And yet over the last month French finances have deteriorated dramatically. Neither programme has the slightest chance of being implemented without plunging French finances, and thus the eurozone generally, into a new sovereign debt crisis. France is dancing on a debt volcano.

The unabashedly ideological Nupes programme calls for nationalisation of the banking and energy sectors, motorways, strategic industries, raising the minimum wage to €1,500 (£1,500) a month, increasing paid holidays from five to six weeks, cutting the working week for certain sectors from 35 to 32 hours and reducing the pension age from 62 to 60. Not to mention the European Central Bank nullifying all member states’ debt. To be fair, Nupes has itself costed its programme at an astronomical €250 billion (£210 billion) annually, though more independent organisations such as the respected Institut Montaigne puts the figure closer to €332 billion (£280 billion) annually.

Nupes claims that its programme will be financed by taxes on the rich and renewed consumer spending resulting from shifting wealth from rich to poor. But costings were done when French inflation was at 2 per cent and the interest on French debt close to zero per cent. French inflation in May was 5.2 per cent and debt financing at 2.2 per cent, both rising fast. Add to that a French national debt to GDP ratio of 115 per cent which, in absolute, rather than percentage, terms is the highest in the EU; when public and private debt are combined, it reaches a staggering 361 per cent (UK 289 per cent, Germany 205 per cent) making France for the first time the greatest debtor in the world.

It is all but certain that Mélenchon’s coalition will not win an outright majority on Sunday. However, the latest polling gives Nupes between 150 and 190 seats, with Macron’s coalition probably denied an outright majority (289) on 255 to 295; marking a fall from his present 346 seats. That will make governing particularly difficult. Add to that the French parliamentary rule that the largest opposition party automatically chairs the highly influential and interventionist finance committee and the financial picture is worse than sombre.

But what of Macron’s programme, if he gets a chance to implement it? Macron continues to claim that his second presidential mandate will see more company and personal tax cuts paid for by reforming the French social benefit system and raising the pension age from 62 to 65. His financial calculation done months ago rests firmly on continued economic growth. But in the last quarter the French economy shrunk by 0.3 per cent and growth prospects are poor. What's more, seat projections for the new assembly put the Rassemblement National – opposed, like Nupes, to pension and social reform – on 20-45 seats, meaning Macron is unlikely to have the parliamentary muscle to reform anything. Meanwhile servicing French debt is predicted to cost huge sums that will not only stymie tax reductions but likely require tax increases (a VAT hike has already been leaked as a possibility).

Both the French presidential and legislative elections have been lacklustre affairs, with Emmanuel Macron continuing to maintain his habitual Jupiterian and scornful posture. To the extent that there has been any serious political debate, all sides have studiously avoided the explosive issue of France’s perilous finances and how to fix them. Fear of depressing French voters further with the reality that after Covid, and potential stagflation, greater pain is to come, is motivated by fear of where historically that leads the French.

After Brexit, France aspired to regain the position she occupied before the first world war as Europe’s banker, with Paris once more at the heart of European finance. That dream came to nought. Now the scenario is more that of France after the first world war: mired in debt, stalemated in policy and with the broader modern prospect of seriously contributing to a new eurozone debt crisis. In the past, France devalued to extricate herself from financial plight, most notably after president Mitterrand’s socialist reforms of 1981 to 1983. Without that option, France could end up passing on the burden to a far more indebted eurozone than in 2012/13, once again fragmented by widening spreads on Italian, Spanish, Greek and Portuguese government bonds. The euro would never survive.