France’s public debt exceeds 110% of its GDP, a level described as alarming. Yet countries like Italy and Japan have even higher debts without causing the same concerns. Why is France under so much pressure?
With more than 3,000 billion francs, France’s colossal debt has reached 110% of its GDP due to the soaring deficit in recent years. To remedy this, Michel Barnier‘s government is proposing 60 billion in savings and tax increases. According to politicians, the situation is serious and the country runs the risk of a financial crisis.
However, debt is commonplace. Many countries saw their debt explode at the end of the 2000s, explains Cédric Tille, professor of economics at the Graduate Institute, on Monday in the RTS show Tout un Monde.
The subprime financial crisis of 2007-2008, followed by that of the euro zone, then the Covid-19 crisis, all required significant “fiscal stimulus measures to support economic activity”, he recalls. , noting that the Covid-19 crisis has particularly pushed States to spend massively to avoid economic collapse.
The snowball effect of public debt
The problem is that some countries, like France, continued to spend at the same pace after the crisis. At the start of his presidency, Emmanuel Macron managed to reduce the budget deficit to less than 3% of GDP. However, in recent years, this deficit has increased sharply again, reaching 6%.
If a state’s fiscal policy becomes risky (…), investors will demand ever higher interest rates to lend their liquidity.
Arthur Jurus, head of investments for the private bank Oddo BhF
Arthur Jurus, head of investments for the private bank Oddo BhF, points out that the increase in the public deficit forces the state to continually go into debt, leading to increased spending just to repay existing debt. If a state’s fiscal policy becomes riskier or goes awry, investors will demand higher interest rates, thereby increasing the share of the budget devoted to debt repayment and creating a snowball effect that is difficult to manage.
Thus, France today devotes 10% of its GDP each year exclusively to paying interest on its debt. These are sums that it obviously cannot allocate elsewhere. This situation could start to worry investors.
Contrasting strategies between France, Italy and Japan
France is not the only country to have a significant debt. Italy, for example, has an even higher debt, reaching 140% of its national wealth. However, it manages its deficits better thanks to lower public spending. Another example is Japan, whose debt exceeds 250% of its national wealth. Despite this, Japan borrows at very low rates due to its stability, which inspires confidence among investors.
Although French debt is high, it is not yet alarming, as it is mainly held by European residents and institutions. These creditors can bear higher interest rates and they want to support the French state.
A fast-growing country can manage higher debt through increasing revenue and growing its tax base.
Cédric Tille professor of economics at the Graduate Institute
The tipping point for a debt to become unsustainable is the risk of default, as was the case for Argentina when foreign investors withdrew. Greece, meanwhile, avoided bankruptcy thanks to help from eurozone lenders.
A country’s risk does not depend solely on a number, but on a set of contextual factors, governance and long-term economic prospects, explains Cédric Tille. He points out that a fast-growing country can manage higher debt because its revenues will increase and growth will generate the necessary tax base.
Radio subject: Francesca Argiroffo
Adaptation web: Miroslav Mares
