France's debt woes unnerve EU partners and markets

FE Team | Published: September 24, 2024 23:55:19

BRUSSELS, Sept 24 (Reuters): Concerns are growing among France's European Union partners and on financial markets that the fragility of its minority government could weaken efforts to shore up its public finances and so risk undermining the EU's new fiscal rules.
France unveiled a new government on Saturday, led by Prime Minister Michel Barnier, which will have to rely on the far-right National Rally in key votes like the 2025 budget or the seven-year debt reduction plan required by EU rules. Both the far-right and the far-left - each with around one third of the seats in parliament - oppose spending cuts, even as France's budget deficit is set to rise to around 6 per cent of GDP this year, twice the EU limit.
"The political fragility of the coalition is clear," said one eurozone official, who like others interviewed for this story requested anonymity because of the political sensitivities involved.
"I would not say that expectations are overly optimistic." The European Commission reckons France's public debt, at 110.6 per cent of GDP in 2023, will rise to 112.4 per cent this year and 113.8 per cent in 2025 unless action is taken. EU rules require a fall of 1 per cent point of GDP a year. "This is a real dilemma, obviously. Putting together a debt-cutting plan that is both compliant with the new framework and politically acceptable in the hostile French parliament is going to be extraordinarily difficult," a second euro official said. "In the end, one needs to hope that there is sufficient realisation in Paris that the cost of failure could be very high, and that will encourage some parties to at least temporarily lend their support to the government," he said.
Market concern about French public finances is pushing the country's borrowing costs higher. The yield on France's 10-year bonds briefly rose above Spain's on Tuesday for the first time since the 2008 financial crisis.
Barnier plans to present the 2025 budget to the French parliament and the European Commission by mid-October. A 7-year plan of reforms, investments and debt reduction is expected a couple of weeks later, by end-October.
While EU officials believe market pressure could put pressure on French politicians to make tough decisions, they fear a weak plan would undermine the credibility of the new EU fiscal framework that came into force in April.
"I don't expect that this time France will easily get away, this would be a major blow for the new rules," a third senior euro zone official said. France has in the past enjoyed special treatment from the EU executive when it comes to compliance with EU fiscal rules.