France has become one of Europe’s most financially troubled countries, with huge debts and budget deficits that are likely to continue to grow despite efforts by a fragile new government to address the problems. is high, Fitch ratings agency announced on Friday.
A day after France’s new Prime Minister Michel Barnier introduced a harsh austerity budget aimed at repairing the country’s rapidly deteriorating public finances, Fitch issued a negative outlook on France’s sovereign rating. The rating has remained unchanged at the “AA-” level for now, but Fitch warned that the rating could be downgraded if the government’s budget plans collapse.
The outlook reflects larger financial risks swirling in France since President Emmanuel Macron dissolved the House of Commons in June and took until last month to appoint a new government. The incident left parliament deeply divided, split almost evenly between rival left, right and centrist factions, leaving Mr Barnier with no clear majority. That will make it difficult to pass a tight budget and reassure nervous foreign investors at a time when France’s national debt has ballooned to more than 3 trillion euros ($3.28 trillion).
In a statement late Friday after Fitch’s announcement, French Economy Minister Antoine Armand said the government was determined to “reverse the fiscal trajectory and keep debt under control.”
France is considered too big to fail as it is the second largest economy among the 20 countries that use the euro currency. European Union rules require member states to have sound public finances, including limiting debt to 60% of economic output and ensuring that government spending does not exceed revenue by more than 3%.
However, France is currently well overstepping these limits and recently received a formal reprimand from the European Union. France’s debt has ballooned to more than 110% of its economic output, making it the worst in the region after Greece and Italy. Fitch warned that if nothing is done, debt could soar to more than 118% of gross domestic product (GDP) by 2028. This year’s annual budget deficit is expected to widen to 6.1% of gross domestic product (GDP), significantly higher than expected and more than 10% higher than last year.
The turmoil comes at a time when France’s economy is in a tough spot, with a variety of factors hitting growth, including wars in Ukraine and Gaza, high interest rates, and economic slowdowns in France’s trading partners Germany and China. It’s happening in Economic growth is expected to be just over 1% next year, but French finance officials warned last week that deep budget cuts could have a negative impact on the economy.
The austerity budget Mr. Barnier introduced includes plans to save 60 billion euros (about $65.6 billion) next year through a series of tax hikes on wealthy people and businesses and deep cuts to social programs and government spending. . But Fitch warned that France also needs to stop a downward spiral in which more and more government spending is required to pay interest payments to service the country’s growing debt.
France is paying 50 billion euros in debt repayments this year alone, which could reach 80 billion euros by 2027. Debt repayments are already huge, exceeding France’s defense budget. If nothing is done, interest payments are likely to eat up nearly 5% of all the money the government collects in taxes and other revenue by 2026, according to Fitch.
The Paris government was increasingly concerned that borrowing costs would rise further after international rating agencies downgraded France’s sovereign debt. Standard & Poor’s downgraded France’s debt rating earlier this year, and rating agency Moody’s also warned of a downgrade amid political turmoil this summer. Moody’s is expected to release a new outlook for France later this month.
The country’s finances have worsened in recent years as Mr Macron increased spending to protect businesses and households from the energy crisis and to stimulate the economy and jobs. Local governments also spent beyond their means. But France’s tax revenues fell sharply last year, a vestige of massive tax cuts Mr Macron enacted for businesses and the wealthy to make France a more attractive investment destination.
Given these dynamics, Fitch believes France is likely to achieve its goal of reducing the budget deficit to less than 3% by 2029 unless significant (and politically unpopular) austerity measures are taken. He said that the gender is low. Despite proposed cuts to government spending, including cuts to health care and pension payments, the government will continue to gradually increase military spending due to Russia’s war in Ukraine. France is also splurging on renewable energy projects to meet European Union obligations to reduce carbon emissions by 2030, Fitch noted.
And France’s political situation remains fragile. In a vote at the end of the month, Fitch said rival parties in Congress could push for tough concessions to pass the budget. Barnier is already facing competing demands to amend the budget, including calls from centrist parties not to raise taxes on the wealthy or corporations. Right-wing and far-right parties, which currently hold about a third of parliament, have called on him to find more room to cut government spending, including on immigration aid.
If there is an impasse, Barnier could be forced to pass the budget by executive order. However, it could prompt a vote of no confidence in parliament and cause the government to collapse. “High levels of political fragmentation and a minority government complicate France’s ability to deliver,” Fitch said.
