Tag: debt

Tax-advantaged bonds reserved for French citizens, a debt write-off at the ECB, or shifting part of the bill onto the Germans — France’s approach to its national debt is at times creative, at times brazen. Above all, this curious collection of ideas reveals complete helplessness in dealing with public finances.

When societies drift toward central planning and state-run economies, only nuances separate political clownery from its disastrous real-world consequences.

Political initiative turns into permanent intervention — and eventually, the resources run out.

At the moment when fiscal reality hits, political elites appear overwhelmed and helpless.

France, in particular, has taken its state-run economy and welfare system a long way. The latter has settled over society like a sedative. In its naïve belief in the omnipotence of the state, the country has spiraled into a debt trap.

In an effort to create some financial breathing room, the parliamentary LIOT group (Libertés, Indépendants, Outre-mer et Territoires) presented an unusual proposal. It wants to raise a kind of citizen loan worth 50 billion euros, financed through government bonds available exclusively to French citizens. An interest rate of 3.5 percent is supposed to channel French savings into this financing vehicle, which would also guarantee tax-free interest payments.

With a maturity of ten years and an inflation rate that has now climbed above three percent in France, this is hardly an attractive deal — particularly as the country’s debt continues to rise unchecked and the budget deficit is expected to exceed six percent next year. With every passing year, the default risk on French bonds increases. Nor will the attempt to shift the debt from foreign to domestic creditors change that. The lawmakers expect this curious bond to generate interest savings of up to 25 billion euros over ten years. The government has so far rejected the proposal. France is in a state of political lockdown.

There is no room left to maneuver in fiscal policy. Any attempt at austerity is met by the United Left in the streets. Migrant riots, looting, and orchestrated chaos block this route out of the budget crisis. That leaves tax policy. With government spending accounting for more than 57 percent of the economy, tax increases have become inevitable year after year, as the economy can no longer develop.

Prime Minister Sébastien Lecornu has turned the tax screws sharply. This year, his government extended the special levy on the profits of large corporations as well as the 20 percent minimum tax on high incomes. This was followed by a levy on certain luxury assets held in wealth-management structures and a two-euro charge on small parcels shipped from outside the EU — a measure that was subsequently scrapped because the EU is now taking care of the matter. The 2027 budget proposal also envisages further additional burdens, including for companies and employers, as well as for certain food products and rental models.

France is becoming an expensive place to do business. Its private economy is shrinking. The welfare state is exploding, while private investment is nowhere to be seen.

A proposal from the far-left fringe of parliament comes at just the right moment. Jean-Luc Mélenchon, founder and leading figure of the La France insoumise party, came up with the brilliant idea of eliminating that portion of the national debt held by the Banque de France within the Eurosystem.

A fiscal magic trick: one side simply burns the other side’s junk — after all, it is all the same club, the state apparatus.

Public debt would shrink by roughly 18 percent, seemingly out of thin air. Such is the economics of the radical left.

The potential feedback effects and panic reactions in the bond market in response to this extraordinary proposal are simply ignored. That is as far as the superficial thinking of the radical left goes. They are economic gamblers who will keep playing until, as Maggie Thatcher once observed, they run out of other people’s money.

But France would not be France if it did not also attempt to combine patriotism with fiscal ingenuity. Politicians, as we know, are creative when it comes to bending the rules. Rational solutions involving possible social hardships that might hurt their electoral prospects, however, are not particularly popular. The question, then, is how to outdo LIOT’s curious national bond and the communists’ infantile fiscal destruction.

An answer came just a few weeks ago from Marine Le Pen, the potential next president of France. The leading figure of the Rassemblement National came up with the bridge-building idea of using the carbon intensity of each national economy as the basis for calculating part of the EU member contributions. Put simply: Let the Germans pay through the nose while we take it easy.

Cut spending in Brussels and make the Germans foot the bill for our own lavish pensions, hyper-expansive welfare state, and inability to reform — this is precisely the kind of issue from which the coming conflicts within the political right will emerge.

A fragmented political right coming to power in the EU, one that ultimately retreats into national sovereignty even in matters of fiscal and monetary policy, would spell the end of the European Union and, in particular, the Eurosystem. A quick look at the rising national debts across the eurozone reveals that everything in the EU is moving toward this final crescendo.

Big Government, state-run economies, and welfare systems — these are the defining features of Europe in our era. A cultivated apathy in economic life, an astonishing delusion in matters of migration policy, and the expanding role of the state in an increasingly unfree society will become stumbling blocks for Western Europe. The mounting public debt is an expression of a desperate attempt to cling to the prosperity of the past. Only now is it slowly becoming apparent that this prosperity was long ago ground down in the name of the welfare state

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France’s present economic woes signal serious trouble ahead for the coherence of the European Union. On Wednesday evening, the French National Assembly unanimously rejected the government’s proposed budget, provoking further fears in the bond market. A couple of weeks ago, it was reported that the French government’s budget deficit now stood at 5.1 per cent, the worst it had been for nearly a quarter of a century. Its national debt now stands at over 115 percent of its GDP. Last Friday, the credit ratings agency Fitch downgraded the outlook for France from stable to negative. How close might we be to a French default?

There are precious few good options for dealing with such a scenario. Permitting a country of France’s magnitude to default would undoubtedly undermine international confidence in the Euro, at a time when most EU economies have been struggling under the weight of multiple pressures. However, the only possible means of preventing a sovereign default would be a bailout from the European Central Bank. This option would place an immense burden on Germany and would hit savers there hard. While bailing Greece out in 2010, 2012 and 2015 was considered a necessary course of action to stabilise international markets and save the Eurozone, the prospect of having to do the same for France could prove a bridge too far.

For its part, the German economy has also been under immense pressure for several years, particularly as the industrial sector has suffered under the dual burden of extensive Green regulations, enacted during the high water mark of climate politics during the late 2010s and early 2020s, and geopolitical crises such as the Russia-Ukraine war and the US-Israeli war with Iran and the turmoil in the Straits of Hormuz.

It appears increasingly possible that Marine Le Pen might win the French Presidential election next May. But even if that does happen, would she be able to meaningfully address France’s economic woes or would she be forced to comply with the EU? She has at present promised to cut French public spending to below 50 per cent of GDP by 2032. Yet even relatively modest measures to cut spending tend to be met with fierce protest, making the issue a particularly thorny one for politicians of any stripe. France has of course for several weeks been rocked by widespread protests, rioting and looting as the social fabric frays. Regular politics appears to offer few solutions.

The instability of the political system is evident in the fact that five Prime Ministers have served under President Macron since 2022. It must be noted that this is not a uniquely French problem. In fact, the same effect can be observed both inside and outside the EU as a kind of ‘vortex effect’ seems to be in operation as the postwar era comes to a close and we enter a kind of interregnum before the new era emerges. For those taking the broader historical view, a number of political, economic and social cycles are coming to an end at roughly the same time. And while it is true that modern mass democracies tend to be characterised by a short political cycle and a high time preference among decision makers, these processes have sped up even more as governments repeatedly break down and instability mounts. The larger question is whether any leader can emerge who can break free from this vortex effect or whether the pattern is doomed to repeat until the system breaks down entirely.

The world has been moving away from globalism and towards a more multinodal, ‘nationalist’ arrangement. Yet despite this, even many of the major populist and nationalist political parties and leaders across the West are still operating within the general envelope of the postwar consensus. As the case of Italy under Prime Minister Giorgia Meloni illustrates, even in those countries where such parties have won elections and formed governments, significant change from the prior globalist status quo has not been forthcoming.

This makes it more likely that the present collection of nationalist parties across the EU and elsewhere does not in fact represent the final form that nationalist politics will take. It is quite likely that the longer the present period of turbulence persists, the more hardline political options will emerge. Certainly, if the present political establishment continues to double down on the failed strategic imperatives of yesterday they will only stiffen the very opposition they claim to oppose, running the risk of further and greater crises.

While the integrity of the Euro as both a concept and a practical reality remains the most pressing issue for the immediate coherence of the EU, it is important to keep an eye on other political pressure points too. For instance, the present political and constitutional crisis in Poland will prove a major stress test for the EU. The outcome of the conflict between pro-EU Prime Minister Donald Tusk and the nationalist opposition rallying around President Karol Nawrocki will provide an important indication as to how the globalist-nationalist dynamic could develop across the EU more widely.

Longer-term, all global indicators appear to suggest the ascendance of nationalism and the waning of globalism. The outcome of the Polish crisis could either slightly delay or accelerate this process in Europe. Poland is of growing geostrategic significance in Europe. Its economy is one of the few within the EU that has actually grown significantly over the last few years, while its central bank has in recent years pursued a policy of gold acquisition that now places the country amongst the top ten national gold holdings in the world, standing at over 630 tonnes. As I predicted in my risk report Europe 2026, the Central European region – comprising Poland, Czechia, Slovakia and Hungary – could over time begin to assume an even more significant regional power unit within Europe. This possibility would also be affected by the outcome of the present war between Ukraine and Russia, which will obviously have a major impact on the broader strategic landscape of the continent as a whole.

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