In any case, Marcel Fratzscher is deeply relaxed. A national debt of almost 115 percent of the gross domestic product in France and planned billions in expenditure despite current global economic dangers from the Ukraine war and inflation? None of this fazes the head of the German Institute for Economic Research (DIW).
“In times of climate change, war, pandemics and digital transformation, budgetary discipline cannot mean less government spending, but requires a significant increase in future investments,” he says. Only: What French President Emmanuel Macrons now wants to spend money on, these are not future investments. Shortly after his re-election on Sunday, he announced further subsidies for car and truck drivers. And food checks for the poorest eight million citizens are also under discussion. That kind of spending could fuel inflation further.
In France itself, a number of economically liberal economists are therefore much less relaxed. “France is not the most indebted country in the euro zone, but among the most indebted countries it has one of the highest shares of debt held by non-residents,” says Agnès Verdier-Molinié, head of the Paris think tank Ifrap. For example from foreign banks. According to Verdier, they hold 47.8 percent of the debt, despite the bond purchases carried out by the European Central Bank (ECB). In the Greek debt crisis a good ten years ago, high proportions of foreign creditors proved to be problematic. This is because these lenders part with their shares more easily than domestic creditors. This can also happen in France, although there are no signs of this yet.
France could clearly belong to the southern zone this time
In addition, however, France is one of the countries with the most bonds, whose interest rate increases with inflation. According to the ECB, that was 223.5 billion euros in March, about nine percent of gross domestic product. “If interest rates rise, that will automatically increase the annual cost of the debt burden, with the risk that those costs will become infinitely high,” says Verdier.
The danger for the euro zone is that, like a good ten years ago, it will split into two zones, a northern zone with relatively little debt and greater budgetary discipline. And a southern zone with highly indebted countries whose interest rates are skyrocketing. With one important difference, according to Verdier: “This time France belongs to the southern zone, although together with Germany it forms the second pillar of the monetary union.”
Some economists believe that Macron would actually have to raise taxes to prevent this from happening. The Frenchman Patrick Artus sees it the same way as Friedrich Heinemann from the Center for European Economic Research (ZEW). “Broad compensation for the loss of purchasing power cannot be financed and is also wrong in terms of energy policy, because incentives for lower consumption are thwarted,” he says. Macron’s calculation will only work if he continues to improve the supply conditions in France and ensure higher growth potential.
But it doesn’t look like that at the moment. General elections are due in June, and as things stand, Macron will then have to rule with a far-left or far-right majority in parliament that could block any austerity efforts, if they exist. Such a scenario, with the President governing with opposition, “would make it very difficult to cut government spending – one of the blind spots in Emmanuel Macron’s first term – and make any significant pension reform towards a longer contribution period,” says Charles-Henri Colombier, economist of the research center Rexecode.
“Germany should do its homework and not lecture others.”
Except for the pension reform, the implementation of which is still in the stars, Macron is not making any plans to save at the moment. Heinemann sees this as a “clear rejection of the stability pact in its current form.” The pact was created to protect the euro area from further debt crises. “Macron knows very well that after the election victory against Le Pen, he has the freedom to act in the EU Commission,” says Heinemann. Because Italy’s Prime Minister Mario Draghi and Macron are largely in agreement “that they do not want to reactivate the stability pact, pressure from Brussels for budgetary discipline is no longer to be expected in the foreseeable future.”
As a result, Fratzscher also sees it that way, only that he approves of the development. “The EU Stability Pact hasn’t been appropriate and effective for some time now, it needs to be fundamentally reformed,” he says. He considers investments in the future and sustainability to be just as important as high levels of debt – and therefore Germany is not a role model. The DIW boss recommends that the federal government exercise restraint towards its partner on the left bank of the Rhine. “Germany should do its own homework and not lecture others.” This will hardly reassure economists like Angès Verdier-Molinié. She sees a “real risk of a debt crisis that could lead to extraordinary taxes.” But the good thing about the worst is that it doesn’t necessarily have to happen.