As France lurches from crisis to crisis, is it becoming the new Italy? – The Irish Times

Dogged by low growth and high debt (which amplify each other) and a sequence of short-lived, unstable governments, France has taken over Italy’s mantle as the sick man of Europe.

Since French president Emmanuel Macron called an ill-advised snap election last year, the parliament has been frozen in stalemate between three groups – left, centre and far right.

The paralysis led to the exit of prime minister François Bayrou this week – the third French prime minister to bite the dust in a year – prompting perhaps the biggest political crisis of Macron’s tenure.

It is a political crisis forged on the back of an economic one.

France’s social model, often seen as the antithesis of the US’s more liberal, free-market system, no longer pays for itself.

[ French government collapses after losing confidence voteOpens in new window ]

As a percentage of income, France’s €3.3 trillion national debt trails Italy’s (113 per cent versus 135 per cent), but the direction of travel is different.

France’s budget deficit, the main driver of this debt, is considerably bigger than Italy’s, at 5.8 per cent of gross domestic product (GDP) versus 3.4 per cent.

The problem doesn’t end there. While Italy is running budget surpluses before taking interest payments into account, France is not. That is why the yield on France’s 10-year debt – essentially the French government’s borrowing costs and the market’s assessment of the country’s financial health – is now close to overtaking Italy’s. They are both hovering at around 3.5 per cent, nearly a percentage point above Germany’s.

Both France and Italy are under the European Commission’s excessive deficit procedures – a mechanism used by the Commission to bring budget deficits back inside 3 per cent of GDP.

While Italy is expected to make progress, the outlook for France is more uncertain because of the political deadlock. How the country arrived at such a perilous financial state stems from 15 years of sluggish growth, an ageing and bigger population, and a sequence of costly crises including the pandemic.

Whatever way you swing it, France’s social model, which relies on public insurance rather than private, is no longer affordable without major cutbacks. These cutbacks continually stall in the face of political and public opposition.

Officials acknowledge that Bayrou’s plan to remove €44 billion from the country’s budget will now inevitably be watered down by his successor Sébastien Lecornu, placing the country on a potentially dangerous debt path.

Lecornu’s new minority government, which must draft a 2026 budget by October 7th, will be less ambitious (which means less hawkish).

“There is no upside scenario, there is no way out, there is no credible scenario where you end up with the same amount of fiscal consolidation,” says Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.

France’s financial turmoil is reflective of the dynamic in several European states where slow growth and high debt has begun to unwind in a dangerous fashion.

UK prime minister Keir Starmer appears to be facing a similar dynamic. Both France and the UK have spiralling debts and major budgetary gaps while both administrations are being increasingly outflanked by right-wing populists who tend to scapegoat migrants for the deteriorating financial situation in both countries.

“The next financial crisis is definitely coming,” German chancellor Friedrich Merz warned earlier this year. “It will be a sovereign debt crisis. We don’t know when it will come. We don’t know from where it will come from, but it will come.”

Merz noted that several EU states, including France, Italy and Spain, now had debts that were bigger than the size of their annual economic output.

The problem for high-debt countries this time around is interest rates which are higher, making the debt more onerous to service.

Debt repayments on France’s debt are forecast to reach €100 billion by 2029 – up from €59 billion in 2024 – which would make them the single biggest budgetary outlay, particularly if growth remains weak and/or if the country’s deficit isn’t cut, the Cour des Comptes audit office warned earlier this year.

The traditional route out of high debt is through growth which makes your debt smaller (as a percentage of income). Increased taxes from stronger growth also helps service the debt.

But Europe’s ailing economy has flatlined. The International Monetary Fund forecasts average growth of just 0.4 per cent this year for the continent’s three largest economies – Germany, France and Italy.

Ireland is the exception. Having experienced strong, jobs-rich growth since the low point of the financial crisis on the back of strong FDI-led investment, the economy here has 1 million additional jobs.

As a result, the State’s national debt – at €218 billion – has drifted into the background in terms of concern. At €40,500 per person, it is still very high on a per capita basis. However, turbo-charged tax receipts means the Government can simultaneously fund big budgets, pay down debt and save resources in the State’s newly established wealth funds – a trifecta of objectives that make us an outlier in European terms.