Is France heading for an financial storm? – DW – 12/03/2024 | EUROtoday

When Prime Minister Michel Barnier unveiled his deficit-reduction plan in October, promising to deliver that determine down to three% of GDP in 2029, he appeared to hope he’d have the ability to steer the French financial system into calmer waters. The nation’s prognosis for this yr’s public deficit had simply jumped from round 5 to over 6% of the nation’s gross home product (GDP). An increase that is still unexplained till at the moment.

But an imminent no-confidence vote in parliament might now upend Barnier’s hopes — and unleash an financial storm.

It comes after Barnier linked the vote on part of the 2025 price range — a primary step to get the deficit on monitor to adjust to the European Union’s fiscal guidelines — to a particular constitutional automobile, which solely permits for payments to be stopped by means of a movement of censure.

The prime minister lacks a majority in parliament and is heading a coalition authorities comprising President Emmanuel Macron’s Renaissance get together and the conservative Republicans after snap parliamentary elections in July. Macron known as these elections after his get together got here second in June’s EU parliamentary elections, receiving lower than half as many votes because the far-right National Rally.

But what appeared to be Barnier’s solely manner of getting the price range by means of parliament is now more likely to backfire, with each left-wing and far-right events vowing to vote the federal government out.

Underlying weak point of the French financial system

The newest disaster comes at a time when a number of the financial indicators have been comparatively steady. French GDP is predicted to develop by 1.1% this yr – while Germany’s GDP is anticipated to shrink by 0.2%. Unemployment stands at 7.4% – which is comparatively low for France. Inflation has gone all the way down to about 2% from 5% a few years in the past.

But for Denis Ferrand, head of Paris-based financial analysis institute Rexecode, these comparatively good figures cannot cover the truth that the French financial system has gotten weaker over the previous few years.

“French – and European – companies have become less competitive with Chinese ones, as our production costs have risen by 25% since 2019. They only went up by three percent in China over the same period,” he informed DW.

Ferrand places that all the way down to years of excessive inflation, rates of interest and vitality costs, particularly after the beginning of the Russian invasion of Ukraine in February 2022, which he mentioned had left “a lot of prudence in the air.”

“We do a quarterly survey amongst bosses of 1,000 French small and medium-sized companies about their investment behavior and, in October, only 36% of them were planning to maintain their investments with 45% saying they’d postpone them and 18% wanting to cancel them,” Ferrand mentioned.

“That trend started to emerge since the beginning of the year, but it really gained traction since July’s snap parliamentary elections,” he added.

A mid-November survey by UK consultancy Ernest & Young (EY) amongst 200 worldwide firm bosses yielded related outcomes: roughly half of these questioned had downsized or postponed their funding initiatives. That comes after France led EY’s funding attractiveness survey in Europe ever since 2019.

The variety of bankruptcies is on the rise

Philippe Druon, chapter and restructuring lawyer at Paris-based regulation workplace Hogan Lovells, confirms traders are reticent.

“It’s very difficult to find buyers for companies that have gone into administration. I currently manage 60 such cases, which is a lot,” he informed DW including that the variety of bankruptcies was as excessive as through the 2008 monetary disaster.

About 65,000 corporations are anticipated to file for insolvency this yr – in comparison with 56,000 final yr.

Druon thinks the rise is barely partly all the way down to a catch-up impact.

“Many companies now have to pay back loans that the government handed out during the COVID-19 epidemic, but there are also structural reasons such as the transition to electric cars and the fact that there’s less demand for office space as many employees now choose to work from home,” he mentioned.

“What’s more, interest rates on the capital market have been relatively high which makes investing in companies less appealing,” he added.

Could France slide right into a monetary disaster?

And but, Anne-Sophie Alsif, chief economist at Paris-based consultancy BDO, says these elements on their very own would not make for a dramatic financial state of affairs. The political issue does although.

“Our macroeconomic figures were about to improve, but if the government falls now and no tailor-made 2025 budget gets voted through parliament, we’ll be sliding into an economic crisis – it would be catastrophic,” she informed DW.

“We would signal to investors that our country is incapable of implementing a deficit-reduction plan,” Alsif confused.

If the federal government will get voted out, it is seemingly the 2024 price range shall be replicated in 2025.

“But that was the budget that increased our deficit to over 6%,” she mentioned.

“Macron’s decision to dissolve Parliament was a monumental mistake. We are now forced to govern our country through coalitions, but we’re incapable of that and thus facing an extremely unstable political situation,” she added.

Still some investor confidence

Christopher Dembik, funding advisor on the Paris subsidiary of Swiss-based Pictet Asset Management, although, qualifies Alsif’s assertion.

“It’s exaggerated to say France is on the brink of a financial crisis. That would mean the country wouldn’t be able to refinance its debt, like Greece from 2009 on, and markets aren’t indicating that right now,” he informed DW.

“Managers of US investment funds have been telling me that they’ve already taken into account France’s political risk in their calculations and France’s current spread – the gap in interest rates for 10-year government bonds compared to those issued by Germany – amounts to 0.8 percentage points which is more than acceptable,” Dembik said.

France at present pays rates of interest of about 3% on these bonds.

But the nation not too long ago, for the primary time in historical past, paid the next charge than Greece. And up till July’s snap elections, the unfold solely stood at 0.5 share factors.

That has economist Ferrand fearing that France won’t have the ability to keep away from a monetary disaster.

“Paris has always been relying on the fact that it’s too big to fail for other European countries,” he mentioned. “But people in Brussels are starting to lose patience with our apparent incapacity to bring down public debt.”

French public debt now exceeds French GDP.

Edited by: Nik Martin