French economists and public auditors alike breathed a sigh of relief as the national statistics agency INSEE on Tuesday published an annual report showing that the country’s 2022 budget deficit dipped below 5% of GDP. Public debt also slightly decreased. Despite these hopeful figures, France still remains one of the most-indebted countries in the EU.
Pointing to France’s better-than-expected post-pandemic economic performance – thanks to which GDP showed an increase of 2.6% year-on-year in 2022 – Finance Minister Bruno Le Maire congratulated the French economy on bringing the budget deficit down to 4.7%. The government had previously set the target to 5% of GDP.
French public debt has likewise benefitted from the recovering economy. “The resilience of our economy has allowed us to reduce public debt to 111.6% of GDP and reach our target in public finances,” Le Maire said on Tuesday while underlining his “determination” to rebalance the books.
In order to do so, the French finance minister has vowed to cut back on public spending by several billion euros.
“Public spending currently amounts to 57% of national output... I would like to bring this number down to 54% by 2027, close to the European average of 52%,” Le Maire told Franceinfo over two weeks ago.
Growing public debt
It's a seemingly difficult undertaking, as the government has spent massively over the past couple of years in an effort to prop up an economy weakened by faltering business during the Covid-19 pandemic and galloping inflation spurred by the ongoing war in Ukraine.
“Between 2020 and 2023, €300 billion have been injected into the economy,” deputy director of SciencePo University's centre for economic research (OFCE) Mathieu Plane told Le Monde as he pointed to discretionary expenditures decided by the government.
On top of spending on vaccination campaigns and other sanitary measures during the pandemic, the government has passed several stimulus plans since last year to avoid a looming recession, which include energy bill vouchers, price caps and early revaluations of social benefits to shelter the French population from rising costs of living.
In addition to previously approved tax cuts, state guaranteed loans and funding of unemployment benefits under President Emmanuel Macron’s 2020 “whatever it takes” slogan, the government has granted subsidies to energy-intensive companies to shield them from increasing production costs.
While France has narrowly avoided a recession by putting the brakes on inflation, estimated at 5.4% for this year by the Bank of France, public debt has as a result risen from 97.4% of GDP in 2019 to 111.6% or €2.95 trillion in 2022.
Ranking in the EU
The figure for public debt might appear shocking at first glance, especially when set against EU fiscal rules outlined in the 1997 Stability and Growth Pact, which stipulate that national debt should not surpass 60% of GDP.
Budget deficit, meanwhile, should not surpass 3% according to the same guidelines.
Although France has clearly exceeded EU limits, it is far from alone among its European partners in the eurozone.
Greece remains the EU member with the highest ratio of 178.2% of government debt to GDP by the end of the third quarter of 2022, the latest data published by Eurostat shows.
Next comes Italy, with a debt to GDP ratio of 147.3%.
Portugal comes third at 120.1%, while Spain is fourth at 115.6% followed by France at 113.4%.
The average national debt to GDP ratio in the eurozone stands at 93%.
France’s closest EU partner Germany meanwhile has a debt to GDP ratio of only 66.4%, slightly surpassing guidelines.
Rising interest rates
Despite a current suspension of EU fiscal rules until 2024 due to heightening economic uncertainty, French financial institutions remain concerned about the high debt ratio.
“French public debt is not sustainable,” former rapporteur at France’s Court of Auditors and FIPECO association president François Escalle said in a March analysis, pointing to decades of accumulating debt and an increasingly volatile market.
Governor of the Bank of France François Villeroy de Galhau called for the government to reduce public debt to below 100% of GDP a few months ago as he warned against rising interest rates.
The European Central Bank (ECB) on March 16 increased interest rate by 50 base points to 3.5%, the sixth consecutive hike since July 2022.
Meanwhile, French 10-year bonds currently yield around 2.8% after surpassing 3% earlier this year.
“The annual cost of public debt is the second item on the State budget” right after public spending on education, Montaigne Institute economy and State action director Lisa Thomas-Darbois told AFP.
Compounded by the fact that one tenth of French public debt is indexed to inflation, public debt interest has cost France around “35€ billion in 2021 and around 50€ in 2022”, Ecalle said.
Ecalle also noted limitations on the rescue operations by the ECB which has intervened several times in the past to bail out debt-ridden countries such as Greece and Italy, but may not continue to do so for fear of further adding to the financial burden of other EU members.
The ECB may always be willing to bail out countries such as France, Italy and Spain because they are “too big to fail”, but the ultimate risk is the withdrawal of another EU member unwilling to shoulder the financial burden, he said, adding this might lead to further fractures in the union over the long haul.
