As the European Central Bank (ECB) suggests that raising interest rates is no longer a taboo, the issue of public debt reduction has returned to the French political agenda. EURACTIV France reports.
French public debt levels are reaching record highs at 115% of GDP, almost 20 points higher than in 2019. French economic growth projections, which were expected to maintain a steady recovery after two years of the pandemic, are now revised down to 2.6% in 2022 from 7% last year.
The war in Ukraine has destroyed any hope of a return to normal economic activity. As inflation sets in (5.2% year-on-year in France in May 2022) and the US Federal Reserve (Fed) has already raised its key rates, the issue of debt management before the legislative elections next week’s French is becoming critical.
“Unlimited and free” debt
Lowering interest rates was central to the monetary policy toolkit used to stimulate the economy after the 2008 economic crisis. to finance the operation of the State, Health Insurance or local authorities costs almost nothing.
France’s public debt, which was around 65% of GDP in 2008, rose to 98% in 2019, before the COVID-19 pandemic hit. According to the governor of the French central bank, François Villeroy de Galhau, this led governments to believe that debt had become “unlimited and without cost”.
As the pandemic hit, debt levels continued to rise in a bid to fund a faltering economy, while French President Emmanuel Macron pledged to revive the economy ‘whatever it takes’ . At the same time, the European Commission granted member states the right to circumvent budgetary constraints defined in the EU treaties.
The goal was clear: to borrow as much money as needed at no cost before growth resumes once the worst of the pandemic has passed. At the time, economic players expected that the ECB would not want to raise interest rates, in order to stimulate economic growth.
A new era of austerity?
The war in Ukraine has undermined this objective, adding to the “inflationary pressures” already existing from the second half of 2021, according to Villeroy de Galhau.
Faced with soaring prices in the United States, the Fed has already raised rates, “forcing the hand of the ECB” to do the same before the summer, Andreas Eisl, an economist at the Jacques Delors Institute, told EURACTIV.
Nevertheless, he specified that there is no crisis situation in the short or medium term “as long as the rates do not explode”. While growth is slowing, the risk of recession remains low.
Eric Toussaint, economist and spokesperson for the international network of the Committee for the Abolition of Illegitimate Debts, has another point of view. He believes that a rise in interest rates is particularly alarming.
“Within 3 to 5 years,” he told EURACTIV, “the cost of refinancing debt will explode. We can expect a return to austerity in the next five years.
“Talking about inflation and interest rates is the last thing Macron wants before the legislative elections. He does everything so that Christine Lagarde [ECB President] don’t raise rates before the election,” he added.
Economic growth or debt cancellation?
While economic topics have so far been dominated by the war in Ukraine and purchasing power, the issue of debt management is now gaining momentum.
“The best way to reduce debt is to have very strong economic growth,” Eisl said. The newly elected French government appears to be on board, as it has pledged €50 billion in new spending on education, green transition and health, as well as a tax cut on businesses. companies of 15 billion euros.
The Minister of Economy Bruno Le Maire presented the government’s economic strategy around three pillars: controlling public spending, supporting investment and innovation to achieve full employment and finalizing the reform of pension schemes to clean up the public finances.
“The objective is to start reducing debt levels by 2026,” Le Maire told French public radio on Wednesday (June 1).
The French radical left party La France Insoumise (LFI), on the other hand, is more concerned about renegotiating existing debt.
While the unexpected new alliance of left-wing parties called NUPES (New People’s Ecological and Social Union), formed on the eve of the legislative elections, confirms its desire to go against the European treaties when and where necessary, the leader Jean-Luc Mélenchon wants to “demand from the European Union that the ECB buy back European sovereign debt” – essentially a cancellation of the debt.
A similar view was expressed by Toussaint, who sees the government announcements as the start of a new era of austerity. He believes that debt cancellation is the only viable option. “25% of European public debt is held by the ECB. If he cancels it, European governments will then have more budgetary room to invest in climate and health.
On the side of the conservatives Les Républicains (LR), it is time for the “rationalization” of public accounts. Valérie Pécresse, LR’s unsuccessful candidate for the presidential election, accused Macron of having “burned the Treasury”.
“You have to keep in mind that the debt is the taxes of tomorrow,” she declared last April to Décideurs Magazine.
[Edited by Zoran Radosavljevic/János Amman]