Waging financial warfare
His tone was sombre, his gaze determined, and the audience was awash with military decorations. In his New Year address to the armed forces on 19 January, the French President announced: “…France must look to its defence industry – an industry on a wartime footing”.
What are the implications of this? Depending on its configuration, length and intensity, a war can distort the usual trajectory of an economy to a greater or lesser degree. But there are some general characteristics: an intensive mobilisation of production capacities, capital, raw materials and intellectual resources; tighter government control of the economy; and the potential introduction of rationing, particularly for energy. In certain extreme cases, measures may even include conscription, which hobbles the workforce.
France got a foretaste of such imposed measures during the recent “wars” (in the metaphorical sense of the word) waged by President Macron. There was the “war against Covid” – as he christened it during his speech announcing lockdown on 16 March 2020 – followed by the “general mobilisation” declared on 5 September 2022 against the surge in energy prices.
But this all requires financing. This is what all wars have in common, whether real or metaphorical. The French public deficit thus rose to the record level of 9% of GDP in 2020. It subsequently remained at high levels of 6.5%, 4.8% and 5.6%, respectively, in the following years[1], despite a return to growth. Public debt has surged to over 110% of GDP according to the IMF, whereas it was below 100% before Macron’s first mandate.
Mobilisation to secure financing therefore determines everything else. Yet as interest rates have risen alongside the level of debt for refinancing, this is becoming increasingly costly. In 2022, the cost of debt was EUR 53 billion (2% of GDP). In 2023, it rose to EUR 55.5 billion according to l’Agence France Trésor. For 2024, it is indeed scheduled to fall, but official forecasts often prove optimistic on this matter.
Mired in debt, France now nervously awaits each review of its sovereign debt rating by the major rating agencies – this contrasts to the serenity of some other European countries such as Germany, Switzerland, Norway, Sweden and Denmark, whose debt situation is not so catastrophic.
This is why the French government has declared a new mobilisation, this time against the deficit. Last minute spending restrictions of EUR 10 billion have been imposed for 2024, and more are forecast for 2025. But what difference does EUR 10 billion make to the EUR 170 billion plus of debt taken out in a single year, in 2023? In order to achieve real stability in the public finances, a credible path to convergence must be traced towards a budget that is structurally close to equilibrium, at least when growth is positive. This looks doubtful when we see how difficult it is for the government to save EUR 10 billion or to raise taxes. This is before we get to the other, in principle, costly mobilisations that have been heralded: in addition to support for Ukraine, there is talk of “rearming” schools, industry, the energy transition, digitalisation, hospitals, etc.
Whilst it is difficult to believe that the war against the deficit can truly be won in the current political configuration, how can France win the war for financing?
The solution may be found in the configuration of the battlefield. France is not the only country in this dangerous situation. The US has debt of 130% of GDP, and Japan 250%. China is certainly in a better position, but western lenders are becoming reticent. And, by definition, countries with lower levels of debt offer fewer opportunities for lenders who are forced to look elsewhere. Without an alternative, investors could be forced to revise down their requirements for borrower quality, without necessarily requiring such a high premium as the fundamentals would suggest.
Victory in the French war for financing could therefore come from the poor quality of the other armies. An inglorious victory, but one that would determine the outcome of all of its other wars.
Final version of 22 March 2024 – Alexis Bienvenu, Fund Manager, La Financière de l’Echiquier (LFDE)