Will France blow up the euro zone? | The Economist

Summary

France’s fiscal strain and political uncertainty could create a serious bond-market crisis. The government is trying to rein in its deficit, but passing a budget is difficult, and debt-service costs are already projected to exceed spending on education or defence. Uncertainty after the elections makes the direction of fiscal policy hard to predict.

Markets were also unsettled by proposals from both the far left and far right to lower the retirement age—a move that would make it harder to reduce pension spending, a major part of the budget.

The discussion suggests that the European Central Bank (ECB) is better equipped than during the euro crisis of the 2010s to prevent financial stress from spreading to other countries. But its support for government debt is conditional: France would need to show “macroeconomic prudence” and make a credible effort to reduce its deficit. The panel argues that France’s importance to the EU does not guarantee leniency; because it is one of the union’s central countries, the ECB may be especially reluctant to offer support without fiscal adjustment.

The greatest danger may be political as well as financial. Giving France a free hand to run large deficits while receiving ECB support could undermine other countries’ willingness to follow fiscal rules. That is particularly sensitive in Germany, where the Alternative for Germany (AfD), founded in opposition to euro-zone bailouts, has strong support and limits politicians’ room to agree to assistance.

The participants generally do not expect France to destroy the euro zone. One forecast is for a bond-market crisis resembling the UK’s under Liz Truss, but not the collapse of the currency union. The discussion concludes that the EU has learned from past crises and that public support for the euro is stronger than it was during the earlier crisis, though conditions could worsen before a resolution is found.

Presenters and Contributors

Henry Curr, Mike Bird, Sophie Pedder and Christian Odendahl.