6 December 2023

France’s €3 Trillion Debt: A Fiscal Quandary on the Horizon?

France’s Economy Minister, Bruno Le Maire, is taking bold steps to address the country’s soaring multi-trillion euro debt, unveiling the 2024 budget plan in September as the starting point for debt reduction. As of early 2023, France’s debt has reached an alarming €3 trillion, constituting 112% of its GDP—an exponential increase since hitting the first trillion in 2003.

France is not alone in grappling with overwhelming debt; it shares this predicament with EU and euro area counterparts like Greece, Italy, Portugal, Spain, and Belgium, where debt has eclipsed 100% of their GDP.

But does this suggest that these countries are careening toward fiscal chaos?

The Genesis of National Debt

National debt, in essence, is the cumulative result of public deficits over time. It materializes when a state consistently spends more than it generates in revenue, leading to an escalating cycle of indebtedness. France, much like other nations, has resorted to massive public expenditures to counteract the repercussions of various crises. Notable examples include the recent energy and cost-of-living crises triggered by Russia’s invasion of Ukraine, the ongoing battle against the COVID-19 pandemic, and the fallout from the 2008 financial crisis.

Debt Ownership and Dynamics

When a couple takes on a mortgage, they owe the borrowed sum plus interest to their bank. Public debt, however, involves more complex dynamics. Over half of France’s debt is held by foreign entities, with the European Central Bank (ECB) claiming a 15% stake. Central banks and foreign investment funds routinely extend loans to governments. Around 25% of the debt is owned by French entities through stocks, bonds, or shares, while the rest is dispersed among various insurance and loan agencies.

The Herculean Task of Repayment

France’s staggering debt is inherently unsustainable, making the prospect of repayment seem nearly impossible. If divided among the population, each French citizen would need to repay €45,000—an imposing sum, albeit less than the per capita share of US debt. Although Finance Minister Le Maire aims for debt reduction in 2024, achieving this would require significant public spending cuts. Debt securities, some with terms extending up to 50 years, further complicate the timeline for repayment.

No universal solution exists for tackling public debt. Countries like Japan, burdened with debt exceeding 250% of its GDP, rely on the reimbursement from people’s savings and life insurance policies.

Navigating a Sea of Crises

The past three years have subjected both people and governments to relentless crises, including the COVID-19 pandemic, the energy crisis triggered by geopolitical events, and the aftermath of the 2008 financial meltdown. As signs of inflation reaching its peak emerge, coupled with low unemployment rates and the potential for central banks to lower interest rates, there is a glimmer of hope that states might find relief and rein in public spending.

Trust Amidst Trillions

Despite grappling with colossal debt, France remains a trustworthy entity in the eyes of financial rating agencies. Despite social upheavals and instances of violence, the country’s relative political stability and a track record of honoring past repayments make it an attractive prospect for investors willing to lend money.

This contrasts sharply with other highly indebted European nations like Italy and Greece, which lack the same level of confidence from financial markets.

In the global context, high debt-to-GDP ratios are not exclusive to France; countries like the United States also grapple with substantial debt. However, robust economies remain attractive, and governments, including France’s, continue to secure approval for budgets that surpass their earnings—a testament to the enduring appeal of economically resilient nations.