Why France’s soaring debt is a real risk regardless of the outcome of its presidential election

On Sunday, France will elect its president for the next five years. It will almost certainly be close. Emmanuel Macron, the outgoing centrist, seems slightly ahead of Marine Le Pen, his far-right challenger. Markets will breathe a sigh of relief if he returns home. But wait. In reality, whoever wins, France’s massive debts are beginning to pose a systemic risk to the global financial system – and it’s not going away, whoever takes charge of the Elysée Palace the week next.

In many ways, Macron has been a decent, if unspectacular, president. This may have masked how quietly France has become one of the biggest debtors in the world. Macron may have talked about balancing the books, but under pressure – first from the yellow vests the protests, which could only be brought under control with higher government spending – then by the pandemic, it spent on a large scale even by the standards of a country where the state already accounted for more than half of GDP. France’s total debts are starting to get frightening. Its debt-to-GDP ratio was below 100% when Macron took office, but it is now above 115%, well above that of major rivals such as the UK (at 94%) and Germany ( a modest 72%).

Not just the pandemic

Part of this is due to emergency measures to deal with the pandemic, and expenses will decrease as these are gradually liquidated. But France also has one of the highest structural deficits in the developed world, estimated at between 3% and 4% of GDP, and attempts to reduce it – for example by cutting state pensions or pushing back the age of retirement – usually encounter riots and a fall of the government. It’s hard to see how the books will ever be balanced again.

Just as alarming as the ratio is the total amount of accumulated debt. France now owes a staggering $3.3 billion, and this is expected to rise to $4 billion by 2027 as the country continues to spend more than it raises in taxes year after year. It’s the third largest national debt in the world, after the United States and Japan, and even worse, it’s owed by a country that doesn’t even have control of its own currency. Unlike Japanese or even Italian debt, which is mostly held by domestic investors, France’s debt is widely traded, with more than half being held in the rest of the world. In short, financial institutions around the world are stuffed with French bonds, complacently assuming they are safe forever. But this can hardly be taken for granted.

Delay the inevitable

It is true that Le Pen may have abandoned his plan to leave the euro and restore the old French franc. It would have really shaken up the markets. And yet, there is no doubt that it would still be very worrying for the sovereign debt markets. She is running on a populist platform, heavy with promises of spending, national sovereignty and opposition to the government in Brussels. In power, she might well revert to the threat of restoring the franc, and she would definitely be locked in constant battles with the rest of the EU, just like the Poles and Hungarians are.

It won’t be so much better if she loses. A re-elected Macron will quickly turn into a lame duck. He has no real party base, no clear successor, he can’t run again in 2027, and at best he’s probably crossed the line to victory with a narrow victory and no real mandate to reform what whether it be. The markets will rightly start to worry about what will happen to French politics after he leaves. And by then, of course, the total debt will be even higher.

In reality, anyone holding large amounts of French government securities will have to take this into account, just as they did with Greek and Italian debt during the Eurozone crisis of 2011 and 2012. Any sort of wobble on the French debt market will reverberate around the world very quickly. Political risks around French debt are now a ticking time bomb under the global financial system. He’s going to explode one day – and that will be true, regardless of Sunday’s result.

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