France: A Foreign Policy Hampered by Sovereign Debt

As French citizens go to the polls, the alarming state of our public finances is almost absent from the Presidential debate. It is critical, however, that we show ourselves capable of balancing the books over the long term.

Our budget deficit remains above 3% of GDP. The French economy grew by a mere 1.1% in 2016 and, with growth expected to reach 1.4% in 2017, it is still growing more slowly than the Eurozone average. The High Council of Public Finance judges that the deficit reductions forecast by the government for 2017 are “unlikely” to occur. At a European level, the Commission emphasizes that France’s high level of public debt, combined with low growth, could in the future create significant risks for public finances. It is likely that France will be the only EU country apart from Greece to run a so-called “excessive deficit” in 2017

The state budget is running a deficit for the 43rd consecutive year and receipts cover only 80% of expenditure. Public authorities (the central government, social security and local authorities), meanwhile, have been in overall deficit since 1981. This constant disparity between revenue and expenditure has led the state to accumulate more than €2,160 billion in debt by the end of 2016, or more than €32,000 per inhabitant. Debt only accounted for 20% of GDP in 1980, but by 2010, both France and Germany’s sovereign debt levels had risen to 80% of GDP. However, whereas our neighbor managed to reduce its debt burden to 72% of GDP by 2015 thanks to budget surpluses, ours has grown to 96% due to budget deficits.

These deficits stem from the systematic use of public spending as the answer to all our problems. In 2015, public spending in France surpassed 57% of GDP, a level exceeded in the OECD only by Finland. Public spending only accounts for 44% of GDP in Germany and an average of 45% in the four comparable European countries. The French “lead” in public spending as a percentage of GDP has increased from 8.5% in 2010 to 11.5% in 2014.

To keep pace with this rise in public spending, we have increased our tax and social security levies to 45% of GDP in 2016, the highest level in Europe and seven percentage points higher than the European average. These exceptionally high taxes make our companies less competitive and penalize employment, making the country less attractive for investment. Public consent for taxation is reaching its limits. Yet budget deficits persist. Indeed, they have reached such levels that the net surplus provided by “private domestic savings” (households and companies) is no longer sufficient to cover them. France is the only country in the Eurozone with a current account deficit that consistently runs a trade deficit. Collectively, we spend more than we produce!

We therefore need to look again at public spending across the board, reducing it but also making it more effective. Only then can we bring down the deficit and debt levels; only then, too, can we reduce taxes and social security deductions, a vital precondition for restoring our competitiveness and foreign trade balance. This will give us the means to improve our growth potential and guarantee social cohesion. We ought to set ourselves the goal of reducing public spending towards the European average of 50% of GDP.

The persistent, unbalanced nature of our public finances also has consequences for France’s influence on the world stage:

• Imbalanced public finances are a real source of worry for our European partners. Since 1997, France has only rarely adhered to its deficit-reduction plans (in 1998–2000, 2010–2011 and 2014–2015). We seem incapable of complying with the terms of treaties that we ourselves have signed, such as the 3% deficit enshrined in the Pact for Stability and Growth and the Golden Rule on structural balances. This affects our credibility and, hence, our influence.
• Our debt makes us very vulnerable to a rise in interest rates. Thanks to the monetary policy of the European Central Bank, its interest charges have fallen (€40 billion), while the volume of credit has exploded. If interest rates were to return to their 2005 level, the cost would double over the medium term and could become unsustainable. That said, interest rates depend on the confidence of investors because debt must be constantly refinanced. If we want our interest rates to remain roughly similar to those of Germany, we must reassure investors by showing them that we have the will and the ability to reduce our budget deficits, and our debt. There is little room for error. Given France’s economic, financial and political weight, any major destabilization of the French sovereign debt market could provoke a crisis in the Eurozone.
• The drift in our public spending is being aggravated by operating expenses and transfer payments. This deprives the state of room for maneuver when it comes to investment spending and preparing for the future. The state is being impoverished. Its balance sheet shows a net negative position which keeps getting worse. This deterioration also limits the extent to which the state can increase spending. At a time when military operations are multiplying and the fight against terrorism is proving to be a long-term endeavor, France’s sovereignty and vital interests are at stake and so too, therefore, is its influence in an unstable world that is defined more than ever by the balance of power. Only ruthless cuts to public spending will be capable of releasing the resources that are needed to rise to this challenge, as well as to reduce taxes and bring down the deficit.

France no longer has a choice. At stake is not only France’s credibility on the world stage and in the eyes of its European partners, but also the confidence of investors, which is crucial to refinancing France’s debt. We must bring down the deficit. This requires structural reforms as well as cuts and changes to public spending, in the interest of growth and social cohesion.

Paper published in our new report : “Foreign Policy Challenges for the Next French President”, April 2017.

By Michel Pébereau, Honorary President of Institut de l’entreprise & Frédéric Monlouis-Félicité, CEO of Institut de l’entreprise.

What are the candidates’ programs on the sovereign debt?

For more details, read our new report : “Foreign Policy Challenges for the Next French President”, April 2017.