By turning the tables around, Emmanuel Macron has not only scattered the cards of French political life "jigsaw-style," he has also thrown the markets and the business world into disarray. Less than two weeks after S&P Global Ratings downgraded France's debt on May 31, he put the issue back in the spotlight.
On Tuesday, June 11, the spread between the 10-year interest rate on French debt and that of its German neighbor, reputed to be the safest, rose to over 60 basis points (0.6 percentage points). The difference has not been this great for four years.
Political instability, of course, is to blame, but so is the prospect of the Rassemblement National (RN, far right) coming to power, with its extreme fiscal prodigality. In his Tuesday note, economist Sylvain Bersinger estimated – based on Marine Le Pen's program for the 2022 presidential election and its cost, calculated by the Institut Montaigne think tank – that the RN program would increase the public deficit by 3.9% of gross domestic product per year. Twice as much as the figure put forward by former British Prime Minister Liz Truss in October 2022, leading to the crash of sterling and the collapse of her government.
At least France, while risking a real debt crisis, is safe from a monetary catastrophe. It owes this to the euro, so disparaged by the French far right. While the euro prohibits France from devaluing its currency, it also prevents it from impoverishing itself by raising the price of imports and penalizing savings.
According to a Banque de France study published in 2019, in 20 years, currency volatility has been divided by 2.7 in the case of France. What's more, exchange-rate risk has been eliminated for intra-European trade, i.e., 50% of France's trade. Finally, the euro has become the world's second reserve currency after the dollar, stabilizing its fluctuation against its currency counterparts.
But the euro does not provide total immunity against runaway debt. Even if the single currency has considerably reduced the interest-rate differential with Germany. Between 1986 and 1992, the spread was 1.9 percentage points (190 basis points), three times greater than today. If nothing is done, the debt burden, which is already close to €50 billion – more than the 2023 defense budget – will reach €80 billion in 2027, as much as the education budget. The moment of financial reckoning is approaching and no political party will be able to ignore that.