Nicholas Sarkozy’s infamous beachside tête-à-tête in October 2010 with Angela Merkel at the French seaside resort of Deauville remains the stuff of nightmares for many in Ireland.
During that meeting, the then leaders of the Franco-German axis of European politics agreed, amid an evolving euro-zone debt crisis, that investors in bonds of EU countries should be forced to take losses as part of any future debt restructurings.
It may have been Merkel’s idea, not wanting her taxpayers to be permanently on the hook for rescuing fiscal delinquents. But Sarkozy acquiesced. A resulting spike in its market interest rates — or bond yields — would be a big catalyst in the State seeking an international bailout weeks later and joining Greece on the naughty step.
Fourteen years on, France now finds itself the sick child of Europe.
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The country has been in a state of crisis ever since President Emmanuel Macron eyeballed his electorate in early June by calling snap elections after a swell in support for the far right in European elections. The gamble backfired, with investors initially panicking about the prospect of far-right taking power and then watching in horror as the vote returned a hung parliament.
The piecing together last weekend of a new government, under Macron’s prime ministerial pick Michel Barnier, has done little to calm investors as officials rush to finalise a 2025 budget in the face of huge challenges.
France, with the third-highest debt burden in the EU, at 111 per cent of gross domestic product (GDP) at the end of last year, has seen its shaky finances deteriorate further during the period of political stalemate.
Its new budget minister, Laurent Saint-Martin, warned this week the country’s budget deficit may top 6 per cent of GDP this year, double the 3 per cent EU ceiling. He must find billions of euros of new taxes and spending cuts in the next two weeks to help frame a budget that will appease the EU Commission, which has already wrapped Paris across the knuckles for a 5.5 per cent overrun last year.
France’s central bank governor, Francois Villeroy de Galhau, said on Wednesday the country may soon be alone across the EU in being unable to bring its deficit within union limits, as economic growth also remains muted. That’s despite a series of changes under Macron to corporation tax, labour laws and, most contentiously, pensions to make the country more competitive.
While the yield on 10-year German bonds, the benchmark for European bonds, has fallen by 0.52 percentage points since Macron’s election call to 2.16 per cent, mainly on European Central Bank rate-cut expectations, French yields have only declined at half the pace, to 2.95 per cent.
This increase in the perceived riskiness of French bonds has widened the differential — or what bond traders call spread — with German notes.
“In recent days, international lenders, those who lend to France, are also telling us we must now react,” Villeroy de Galhau said on French television on Wednesday. “Before June, we had an interest-rate spread with Germany of around 0.5 percentage points, and now we are close to 0.8, so we really must deal with this sickness.”
The dwindling of France’s standing as one of the safest bond markets in Europe was marked by its 10-year bond yields rising this week above those of Spain, which had once been bundled with Portugal, Ireland, Italy and Greece as the PIIGS, for the first time since 2007.
Much more surprisingly, its yields were within 0.2 of a point Greece, the former economic pariah, at one stage last week. The gap had been as wide as 31.8 points 12 years ago.
Dispatches from Athens have been a lot more upbeat in recent times. Having emerged from its third international bailout in 2018 and being upgraded to investment grade within the past 12 months by S&P Global Ratings and Fitch Ratings, following 13 years of junk status, the Greek government set its sights this week on cutting about 20 percentage points from its debt pile within four years — to about 130 per cent of GDP.
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That it would still leave it among the euro zone’s most indebted nations (Italy is at 138 per cent and rising). But it’s well down from a peak of 207 per cent in 2020. Its economy grew at 2 per cent last year — a multiple of the EU average of 0.4 per cent — and is on track to top that this year and next.
Greece expects its primary budget surplus — excluding interest payments — to be 2.4 per cent of GDP this year. It is rapidly reprivatising banks that were rescued during the crisis repaying bailout loans ahead of schedule.
Of course, many ordinary Greeks still reeling from years of austerity have yet to feel the benefits of the rebound, with an unemployment rate of about 10 per cent — two-thirds higher than the EU average. And while real wages have started to tick up in recent years, they remain well down on pre-crisis levels.
Still, it’s hard to imagine where Greece would be now had Sarkozy’s successor, François Hollande, not pushed against Merkel in July 2015 and helped broker an 11th-hour third bailout of Greece — averting a cataclysmic Grexit.
And while there is no love lost between Hollande and Macron — who started plotting a path to the Élysée Palace while serving in his predecessor’s government — France’s borrowing costs would be much higher now had Hollande not stepped forward to prevent a rupture in the euro zone.
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