The Bayrou government fell on September 8 and as expected – asking for a vote of confidence from the Parliament. With 364 votes against and 194 in favor, they did not give a vote of confidence.
In reality, however, there is no serious and immediate problem for the French economy, the problem is political. That is, a French government will need to pass some spending cuts and some tax increases in order to reduce the annual budget deficit by 44 billion euros. The annual deficit in France is 160 billion and is added to the public debt, which is 2.6 trillion euros, that is, it reaches 113% of the French GDP, which is 2.35 trillion euros. This is a problem for France, which is the second largest economy in the EU, the seventh largest in the world, a member of the G7 and one of the two powerful countries of the European Union along with Germany. The French are forced to compare themselves and compete with the Germans for the scepter of the EU, but Germany has a better debt/GDP ratio (65%) and lower borrowing rates than France, whose borrowing costs have risen in recent days due to the political crisis. And this creates a long-term – if not short-term – problem. That is, the increased borrowing costs cause increased debt servicing costs and increase the annual deficit above the 160 billion that it currently is every year, therefore the state of the economy is getting worse.
France does not need the IMF to rescue it as some fear, it is a very large economy and very wasteful. Therefore, what is needed is some consolidation, which Bayrou tried to do, but everyone rejects it without exception. When he falls, someone else will take over at some point, who will find himself in the same position and will be called upon to consolidate the French economy at great political cost.
The strength of which is even evident from the deposits of the French in the banks, which reach 9 trillion euros. What the French fear is that if no other fiscal measures are found to consolidate the situation, there may be a forced haircut on deposits ranging from 1,000 euros for small ones to 50,000 for large ones. If this happens, the depositors will not lose the money, but will… be forced to lend it to the State for 5 years at a minimal interest rate. This thought certainly bothers everyone and is an extreme, emergency solution, which will not need to be adopted if there is a political agreement and support for some fiscal measures.
And while it is very difficult for French parties to agree on cuts, in reality the 44 billion cuts are relatively painless for the French. Bayrou, who tried to do so – and failed – proposed, for example, that they work two days off, on Easter Monday and on May 8. The French refused. He also proposed that public sector salaries not be increased for 2 years and that the number of civil servants be reduced. All of this is of course rejected by everyone else.
In fact, he did not propose cuts to the excessive benefits that French citizens have, which are unmatched in other countries. In addition to free education and free healthcare (which are both very high-quality and truly free), the French enjoy a multitude of benefits. For example, the poor receive a solidarity allowance of 600 euros per month (1,200 for a poor couple), free housing, free transportation, free legal support if needed. If they have children, the allowances increase. None of this was touched upon by Bayrou, who tried to cut without social costs, but all his proposals were rejected.
Thus, after September 8, the French will be looking for a new government and Macron will negotiate who will be the next prime minister. The possibility of elections is open and the political crisis is a given.
The markets are reacting negatively to all of this – even though there is no serious reason to shake the French economy – and this may be happening more because they see an opportunity for a correction in share prices than because they actually fear corporate bankruptcies and a debt crisis.
However, because the economy is a climate, that is, the perception of reality determines more what will happen than reality itself, in this particular case the markets want to believe that there is a serious crisis in the French economy, while in reality it is a problem that can be relatively easily addressed due to its size. But the stock markets found the opportunity to correct and the French the opportunity to protest, which is their second favorite pastime after eating.
