Nationwide protests over the high cost of living shook France on Saturday, adding to unrest over public spending and debt ahead of a critical vote in the National Assembly. Riots broke out in some cities as luxury boutiques and supermarkets were looted and public buildings were defaced and even set on fire. This came after mass demonstrations earlier this month, in which students decried deteriorating classrooms, missing teachers and buildings not equipped to withstand rising temperatures. Protesters blamed years of underinvestment in public education. At the same time, France’s looming debt has pushed bond yields to the highest levels in 24 years, flashing warning signs not seen since the eurozone debt crisis in 2011. With far-right and far-left candidates in the running to become France’s next president in the spring, markets are losing confidence that either side will take the painful steps necessary to rein in the deficit. For Mujtaba Rahman, general director for Europe at Eurasia Group, France suffers from a crisis of liberal democracy, a crisis of fiscal mismanagement and a crisis of youth discontent. “But the fiscal crisis is the most dangerous, underlying many of the country’s ills and threatening to lead it to ruin,” he wrote in an op-ed in the New York Times on Thursday. “France, truly, is on the brink of the abyss.” Crises are also related to each other. For example, Rahman noted that while France’s education spending exceeds the European Union average, more than a quarter of the money goes to pensions for retired teachers. Similarly, Nobel laureate Paul Krugman drew a straight line between France’s retirement largesse and student unrest. Because of its very generous government pension plan, spending on education has taken a hit, meaning France is effectively subsidizing older French people at the expense of everyone else, he wrote in a Substack post last week. France’s public debt now reaches a record $4 trillion, or 119% of GDP, the highest ratio since the immediate post-World War II period. While the pandemic and the wars in Ukraine and Iran worsened France’s fiscal picture, President Emmanuel Macron also backed away from reforms aimed at reining in debt. Sébastien Lecornu, the latest in a revolving door of prime ministers, has proposed a 2027 budget that would modestly reduce the deficit from 5.4% to 5% of GDP, and faces a critical first vote in the National Assembly on Tuesday. “If his government fails to pass the budget, the cost of servicing France’s debt could skyrocket,” Rahman predicted. “France could be forced to seek help from the International Monetary Fund and pray for it before the European Central Bank, a humiliation for the world’s seventh-largest economy.” The market’s distrust of France is more political than economic, with fears that it has become ungovernable and that the far left and far right are unlikely to make the necessary changes, he added. In fact, far-right leader Marine Le Pen has promised to lower the official retirement age to 62 and even previously suggested lowering it to 60. Meanwhile, far-left presidential candidate Jean-Luc Mélenchon is campaigning on a plan for the central bank to simply write off its holdings of French debt. Such positions help explain why bond investors have driven up France’s borrowing costs to sky-high levels, Rahman said. “They fear the country is becoming socially volatile and institutionally paralyzed.” In fact, the presidential election in May won’t even be that decisive for financial markets, as a legislative election in June might fail to deliver a parliamentary majority for the new president, creating further political deadlock, he said. France could avoid an imminent catastrophe next week if Le Pen orders her allies in the Assembly to abstain on the budget, allowing it to pass. “That may avoid, for now, the kind of crisis suffered by Greece after the financial crisis. But France is no longer in control of its destiny,” Rahman warned. An explosion in borrowing costs would be a sign that France is at the mercy of the bond market, which has begun to price in the increasing odds of a debt default. This is similar to how the UK is effectively in thrall to the so-called bond vigilantes. Thierry Wizman, global currency and rates strategist at Macquarie Group, argued in a note on Tuesday that a series of shocks would have to occur for France to get its act together and appease the bond market. That could include a vote of no confidence that leaves France without a government from the Assembly, a downgrade of Moody’s credit rating, a widening of street protests and violence, a sharper and more contagious rise in France’s bond yield spread and the election of Le Pen as president. The European Central Bank would also not rush to the rescue for fear of fostering “moral hazard,” and other bailout mechanisms lack firepower for an economy as large as France’s, Wizman argued. “In any case, it would seem that the valley would have to be crossed before reaching the other side of the fiscal responsibility gap,” he added. “And only after all that transformative pain of the coming months will France be able to regain its composure and commit to austerity.”
