France, a representative welfare state in Europe, has fallen into such a serious financial crisis that the possibility of 'IMF rescue funds' was mentioned by the finance minister. François Viller, appointed by President Emmanuel Macron, has been pushing for high-intensity austerity measures, such as reducing public holidays, to reduce massive national liabilities, putting him on the verge of a parliamentary no-confidence vote. Amid this dual crisis in politics and the economy, the financial market witnessed the unprecedented scene of France's Government Bonds yield surpassing that of Greece.
According to Le Monde and the Financial Times (FT), on the 26th (local time), Eric Lombard, the French finance minister, said in a French radio interview, "I cannot guarantee there is no risk of International Monetary Fund (IMF) intervention."
France's financial situation is sending warning signals across various indicators. The Macron government has poured astronomical finances to overcome the energy crisis after the COVID-19 pandemic and the war in Ukraine. As a result, according to Eurostat, France's national liability surpassed 3.3 trillion euros (approximately 5,000 trillion won) in the first quarter of this year. National liability is the debt that the government must repay. The national liability rate compared to gross domestic product (GDP) is 114.1%. This means that even if all the money earned by the entire population over a year is spent, 14% of the debt remains. This is the third-highest figure in the eurozone (20 countries using the euro), following Greece (152.5%) and Italy (137.9%). It is nearly double that of Germany (62.3%), and nearly three times that of the Netherlands (43.2%).
Currently, France's fiscal soundness is worse than that of Spain (103.5%) and Portugal (96.4%), which were once referred to as 'the pigs (PIIGS)' due to fiscal deterioration during the 2008 global financial crisis. It is difficult to compare with Ireland (34.9%), which once relied on IMF rescue funds. With chronic fiscal deficits, France's fiscal deficit ratio recorded -5.8% of GDP last year. This means that the money outspent the money received by 5.8% over the course of a year. This figure is higher than that of Greece (1.3% fiscal surplus), Italy (-4.3%), and Spain (-2.5%). The European Union (EU) recommends maintaining a deficit within -3% for stability.
As a result, the financial market witnessed an unusual phenomenon starting from the 26th, where France's 10-year Government Bonds yield (3.5%) surpassed that of Greece (3.44%). This is the lowest record since the eurozone financial crisis in 2012. The yield difference with German Government Bonds, which also leads Europe, widened to 0.8 percentage points. The French stock market was also shaken. On the 26th, the CAC40 index dropped by 1.7%. Shares of major banks, including BNP Paribas and Société Générale, plummeted by more than 6%. These banks hold large amounts of French Government Bonds. A decline in France's national credit rating could likely lead directly to bank solvency issues. CNBC reported, "The risk premium for French assets has resurfaced in the investment market."
As the financial crisis surfaced, Prime Minister Viller, who leads the cabinet, held an emergency press conference on the 25th and declared a 'national emergency.' He proposed a deficit reduction plan amounting to 44 billion euros (approximately 65 trillion won) while requesting parliamentary confidence votes on the 8th of next month. Viller appealed, "If we do not control liability now, we will fall off a cliff," urging lawmakers to choose between chaos and responsibility.
However, immediately after the announcement, politicians and voters directly countered the austerity measures proposed by the prime minister. The austerity measures included reducing the number of civil servants, cutting subsidies for pharmaceuticals, and abolishing two public holidays, including the Monday after Easter and the Victory Day of World War II (May 8). Additionally, the pension cap, freezing welfare expenditure, and increasing certain taxes were also included. Polls showed that 84% of voters opposed the reduction of public holidays. The far-right National Union (RN), the leftist La France Insoumise (LFI), and the Socialist Party announced that they would vote against the prime minister's proposed austerity measures, regardless of political affiliation.
Ultimately, the attempt at a frontal breakthrough has escalated into a crisis of cabinet collapse. Major media outlets predict that considering France's political landscape, which is characterized by a fragmented parliament, the likelihood of passing the confidence vote next month is much lower than that of rejection. Last year, former Prime Minister Michel Barnier was also subjected to a no-confidence vote due to failure in budget processing.
As the collapse of the regime looms, President Macron stated on that day, "The country is in danger," reaffirming his commitment to reform. France is currently paying 66 billion euros (approximately 107 trillion won) annually in interest on its national liability. This amount has already surpassed the French defense budget. According to the cabinet, if France continues to operate its finances as they are now, the interest expense will rise to 100 billion euros (approximately 163 trillion won) by 2029. This means that 'repaying interest' will become the government's biggest expenditure, surpassing all areas, including education and welfare. Charlotte de Montpellier, chief economist for France at ING Bank, stated in a report, "Political instability in France is turning into economic liability." She added, "This year's growth rate will only be 0.8%," noting that "the political crisis adds uncertainty."
Experts warned that if France, the second-largest economy in the eurozone, shakes, the shockwave could spread throughout Europe in a way unlike the past southern European financial crises. France accounts for about 15% of European GDP, and its total national liability accounts for nearly 20% of the eurozone as a whole. Goldman Sachs pointed out that "this incident reminds investors not only of France but also of various countries' fiscal vulnerabilities across Europe."
If the prime minister's confidence vote next month fails, President Macron must appoint a new prime minister or call for early elections after dissolving the parliament. However, under the current circumstances, neither option seems to provide a sharp solution. Even if a new prime minister is appointed, passing the fiscal reform plan would be impossible unless the fractious parliament structure changes. Early elections could exacerbate the situation by empowering the currently dominant far-right National Union, creating a significant political burden. Last year, President Macron also faced disastrous results by forcing early elections, resulting in the far-right National Union led by Marine Le Pen becoming the main opposition party.
The Financial Times (FT) reported, "France has fallen into a 'complete stalemate' where even the political leadership to resolve a serious liability crisis is missing." The cost of ignoring fiscal soundness, intoxicated by the sweetness of welfare, threatens not only France but the entire European economy.