Le choix français

France may need to accept a painful fiscal adjustment because political resistance could ultimately raise the risk of restructuring its government debt.

• Greece’s real GDP fell by more than a quarter from its 2008 peak and remains about 13% below it, while Portugal and Spain each lost close to a tenth of output.
• Italy returned to its 2008 output level only in 2022, yet borrowing costs eventually declined as fiscal reform combined with central bank support.
• Greece, Portugal, Spain and Italy represented 31% of euro area GDP in 2011, compared with France’s 18% today, suggesting Europe has previously managed a larger aggregate problem.
• France’s latest budget identifies €54 billion of savings, but reduces the deficit only from 5.4% to 5.0% of GDP under growth assumptions deemed optimistic by the country’s fiscal watchdog.
• Stabilising debt at current yields would require a primary surplus slightly above 2% of GDP, compared with France’s best five-year average of below 1% since 1995; the 2027 election adds political uncertainty.

Takeaway: The author views fiscal consolidation supported by conditional ECB assistance as the logical route, while warning that political refusal could leave France exposed to a restructuring of its government securities.