What is happening in France, struggling with debt alarm and the threat of higher taxes? The crisis of the second European power is part of the context of uncertainty about the future of the EU.
In the context of European economic weakness, France is not an exception.
The second power of the EU is simultaneously facing a political crisis - only partially resolved with the appointment of a new prime minister - and crucial financial problems, with public accounts in disarray and an increasingly worrying debt alarm.
The governor of the Bank of France, Francois Villeroy de Galhau, has just said that the country must address the deficit and debt challenges, as bond markets increasingly warn of risks.
The French government is under pressure to find rapid solutions to the country’s fiscal problems and must present a budget bill for 2025 to Parliament in the coming weeks. A tax increase is not excluded in this context of such high debt and necessary resources.
Not to mention that the economic prospects of EU members are also looming over the demands of Brussels under the reinstated Stability and Budget Pact. Surprisingly, France could be worse off than Italy in reaching a deficit below 3% of GDP.
France in crisis promises higher taxes
The French government is studying the introduction of targeted taxes on the rich and large companies, in an attempt to address the urgent need to repair finances without undoing President Emmanuel Macron’s pro-growth reforms: this is the plan of the newly appointed Finance Minister Antoine Armand.
His comments come as investors are abandoning French assets due to political turmoil and the risk premium on the country’s debt is approaching its highest level since the eurozone crisis.
“Apart from one or two years of exceptional crisis in the last 50 years, we have one of the worst deficits in our history,” Armand told France Inter radio on Tuesday.
“The question we have to ask ourselves is how we can all contribute intelligently given the gravity of the budgetary situation,” the minister said, adding that any additional taxation must not hinder growth and job creation.
Armand reiterated that Prime Minister Michel Barnier’s administration would not increase the burden on workers and the middle classes, but said making the rich pay additional taxes could be the right compromise.
But the French central bank governor says most of the effort should come from spending cuts, although taxes that do not damage economic confidence should also be used.
Tax increases are a controversial issue, even in Barnier’s new cabinet, as lawmakers are reluctant to reverse seven years of Macron’s pro-business policies, which they say have restored France’s economic fortunes. However, opposition parties in parliament have made tax increases on the wealthy a cornerstone of their economic proposals.
Barnier will provide more details on his plans when he presents his policy program to parliament on October 1.
France’s debt crisis deepens
The latest statements from Francois Villeroy de Galhau, president of the French central bank, were clear: “It is not realistic for France to reduce its deficit to 3% of GDP in three years, but it could be within five years with the right course of action”.
The fiscal knot is therefore harder to untangle than it might seem. Earlier this week, the finance minister said the country’s budget deficit was one of the worst in history. The government currently forecasts a 2024 budget deficit of 5.1% of GDP, above the European Union’s 3% limit.
In this context, a gauge of French bond risk, the gap between French and German 10-year yields, is at its highest since the political chaos peaked this summer.
Citigroup expects it to widen to 100 basis points next year, from around 80 currently. Meanwhile, French stocks have fallen more than 6% since President Emmanuel Macron called a snap election on June 9.
Calibrating the budget is key to restoring investor confidence. France has strayed so far from its long-term deficit reduction plans that it would take a huge effort to get back on track to meet the European Union’s deficit reduction target of 3% of economic output by 2027.
According to Bloomberg analysts: “If Barnier’s government can deliver a credible fiscal strategy that reassures markets and broadly complies with EU rules, it could boost confidence in France’s economic direction. However, given political fragility and extended fiscal targets, the path ahead is fraught with risks.”.
The specter of economic crisis and financial instability is thus widening in Europe. To Germany’s severe industrial and structural problems and Italy’s chronic weaknesses in debt sustainability, are added political and economic uncertainties in France.
Original article published on Money.it Italy 2024-09-25 11:45:16. Original title: Tasse più alte e allarme debito, cosa succede in Francia?
