France's perpetual over-indebtedness shackles future generations
According to some commentators, public debt is no longer a problem. In fact, even the government is assuming this position. France is sailing towards a public debt equivalent to 115% of its GDP this year, if we are to believe the new amending finance law 2020. And in fact, it will probably be much more.
Admittedly, through this extremely serious crisis, everything must be done to save our businesses and our jobs. Going into more debt is an indisputable choice.
But is the government justified in arguing that such exponential indebtedness is absolutely innocuous? The problem stems from the already huge public debt accumulated in recent years, as well as its implications for the future, which should not be underestimated. Regardless of the current crisis, €599 billion of public debt will mature by 2023.
According to IMF forecasts, at the end of the year, public debt in Germany will equate to only 68% of GDP, as opposed to 115 or even 120% in France. This is due to public management efforts made in recent years in Germany: reform of the social model, raising the retirement age to 67 years, balancing their public and social accounts with their famous “Schwarze Null” (zero deficit objective).
Thanks to this zero deficit policy, the Germans were able, in response to the Covid-19 crisis, to draw what they called a “bazooka”: a plan to support the economy with up to 4.9% of GDP, i.e. €160 billion. In France, the public aid plan will represent “only” 2.3% of GDP, or €52 billion. It might also be less effective as the state guarantee is not 100% for SME loans as in Germany, where taxes and charges currently deferred can be cancelled if necessary. Probably much less so in France.
While the Netherlands reduced its public debt ratio by 20 GDP points between 2014 and 2019, Germany by 16 and Austria by 15, France increased its ratio by 3 GDP points. The consequence is obvious: our country is now facing bigger challenges through this crisis than our partners in the northern part of the eurozone.
Moreover, the inability of past French governments to contain the permanent increase in public debt casts doubts over our ability to reverse the trend as we emerge from this crisis. Taxes in France are the highest in the world, therefore raising them further in 2021 is not an option. Moreover, the fiscal yield would simply not be there. But without a rapid decline in the public debt ratio, debt will become a structural non-choice, synonymous with our inability to curb spending and the definitive loss of our financial sovereignty.
Some commentators argue that, due to the European Central Bank’s policy, debt is no longer a problem because the ECB buys public debt and can indefinitely fund our deficits. The argument resembles self-persuasion more than anything: we don’t have masks, because they are useless; we have too much public debt, but it is not a risk. The lies we tell ourselves, like the case of “good” cholesterol... This framing voluntarily ignores the fact that the ECB won’t drive sovereign debt purchases for all eternity. Our European partners will not allow it, nor will the European treaties that we have signed.
France will have to raise more than €300 billion on the markets this year, i.e. almost 15% of its GDP, which is the IMF risk threshold for state refinancing. The timid debt reduction in 2019 (-0.3 GDP point) now seems quite ridiculous. This new public debt will result in an increase of €40 billion in medium/long-term debt issues, but also in very short-term (one year) outstandings of more than €50 billion. This exposes the state to a more prominent refinancing risk, and to a very tense situation if rates rise in the upcoming months or years.
We must therefore refute the fallacy that a perpetual debt is harmless, because that would be tantamount to further shackling future generations due to our carelessness.
First of all, we need to extend France’s debt maturity, so as not to worsen the debt burden. The proportion of securities with maturities of 30 years or more accounts for around 10% of outstanding debt. We will have to increase this proportion and go even further in our policy of very long-term issuance, up to maturities of 50 or even 80 years or more.
Secondly, the creation of debt in the future will have to be curbed by adopting the debt brake mechanism already in place in Germany, which allows for better crisis management today.
Finally, there will be no escaping the great waltz of recovery spending plans in the upcoming months. We will be promised exceptional measures for future investments that will inevitably turn into permanent operating expenditure. In 2022, during the presidential election, when the alarm bells will ring, the mad waltz will return, with an array of wild and wilder ideas for raising taxes.
This path would lead us into the trap of perpetual over-indebtedness and an ever-increasing burden of debt interest on our budget. This is the path of irretrievable decline. Another path is possible, the one adopted by northern countries: debt reduction in periods of growth, sound management of public finances, longer working hours, lower taxes on capital and businesses, to achieve growth that benefits everyone.