It's not just the federal government that's under pressure to rearrange its spending plans. In France, there are neither unlawfully repurposed credit appropriations nor the debt brake, but the comparatively higher level of new debt restricts fiscal room for manoeuvre. The government in Paris expects deficit ratios of 4.9 and 4.4 percent for this year and next. It is not until 2027, the last year of President Emmanuel Macron's term in office, that she wants to comply with the EU debt limit of 1 percent, which will come back into force on 3 January.

Niklas Záboji

Business correspondent in Paris

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But even these expansionary spending plans are based on assumptions that are increasingly proving to be overly optimistic. In Paris, for example, economic growth of 1.4 percent is still expected in the coming year, although the majority of economists expect at most one percent. As of this week, the OECD is forecasting only 0.8 percent. One thing is clear: Less growth automatically results in higher new debt as a percentage of gross domestic product (GDP) while spending remains the same.

"If we assume only 1.4% instead of 0.8%, the deficit is likely to increase by 0.3 percentage points," said Hélène Baudchon, economist at BNP Paribas. Instead of 4.4 percent, 4.7 percent is to be expected next year. "This is not entirely negligible, even if it could be offset by cost-cutting efforts," says Baudchon.

"Wake up!"

However, despite all the assurances, the latter have so far basically been limited to the phasing out of energy aid – even though interest rates on ten-year French government bonds have recently risen to as high as 3.5 percent. Since Macron rejects tax increases, consolidation measures are therefore actually unavoidable. In the 2024 budget, spending on debt servicing has swelled to around 50 billion euros.

At the latest, the tightening interest rate environment has made the debt burden an explosive political issue. In Paris this week, people in Paris looked with trepidation at the decision published by S&P Global on Friday evening. However, as in June, the rating agency confirmed the good creditworthiness of the French state with a negative outlook – while Fitch had lowered its rating from AA to AA- in the spring. Typically, the worse the ratings, the higher the risk premium on the bond market.

Against this backdrop, signals have come from Paris in recent days that it intends to remain on course for reform after the controversial pension reform. "Wake up!" Macron shouted to business representatives at the Elysée Palace. He warned of the state of public finances, criticized those who now wanted to redistribute instead of reforming, and pointed to the unemployment rate of more than 7 percent, which is still far from full employment, while many companies were desperately looking for staff. Recently, the unemployment rate has risen slightly again.

At the same time, in order to protect public finances and create more employment, the French government has recently slightly tightened access to unemployment benefits. However, the reform only led to savings of around 2024 million euros in the 700 budget.

Significant skid marks

Finance and Economy Minister Bruno Le Maire is therefore pressing ahead with further proposals: he questions the duration of unemployment benefits for people over 55, which is up to 27 months, and thinks aloud about a right to new training for older workers. "We have the worst employment rate of the over-55s in the OECD," he said. "I want us to put an end to this hypocrisy of the French social model."

Thanks to a smaller share of industry, France is currently in a better economic position than Germany, but high inflation and higher interest rates are also leaving clear brake marks in the consumption and construction sectors. While the statistics office Insee had previously assumed growth of 0.1 percent for the third quarter, it revised this indicator to minus 0.1 percent this week.

"The economic situation is stagnant and bordering on recession," says BNP economist Baudchon. However, consumer sentiment seems to be improving again and is likely to recover further with declining inflation and falling interest rates.

This would also be supported by wage increases and investment activity by companies. "The weaknesses of the French economy are well known, but it remains resilient and is becoming more attractive as a result of the structural reforms that have been introduced," says Baudchon.