MARKET AND EU PRESSURE ON A FRANCE IN CRISIS: A TECHNICAL GOVERNMENT IN PARIS?
What follows is my English translation of an article by Domenico Moro, published on ComeDonChisciotte.org on 16th July 2024. (All formatting original).
The French elections have returned a National Assembly (the French parliament) split into three blocs, none of which possesses the majority on which to form a government with a clear political colour.
The uncertainty as to what the future government of the EU's second largest country and Europe's only nuclear power will be is worrying the markets, or, to put it another way, big French and European financial capital.
After all, the French stock market in the aftermath of the elections fell by 0.63%. What is causing concern, once the danger posed by the extreme right, feared for its Euroscepticism and positions on the war in Ukraine, has been averted, is the relative victory of the New Popular Front (NFP) and in particular the hegemony within it exercised by the extreme left-wing La France Insoumise (LFi) party led by [Jean-Luc] Melenchon. In fact, Melenchon's programme would undermine the austerity course initiated by the Macron government, which reached its apex with the approval of the pension counter-reform law, which was passed without a parliamentary vote, a genuine violation of popular sovereignty exercised through the legislature. Not to mention that LFi has positions that are far from being aligned on the war in Palestine and Ukraine.
The markets' objective is therefore to get rid of Melenchon and LFi and bet on a coalition government led either by a politician they trust, such as the socialist and former president of the Republic [François] Hollande, or by a “technical” figure as was done in Italy with [Mario] Monti and [Mario] Draghi.
But one thing is clear: whatever government is formed will have the French and international finance breathing on its back. The problem is that France is a country not only in serious social crisis, as proven by the many massive mass struggles in recent years, but also economic, political, and geopolitical. The fragmentation of the vote is a reflection of this structural crisis. France is, in fact, a heavily indebted country, which weighs heavily on its internal stability, which is also important for the stability of the EU, especially in the face of the weakening of the German government in the last European elections. As a matter of fact, the Franco-German duopoly, around which the EU is supposed to stand, appears to be in deep crisis today.
But let us turn to the data. The French public debt has passed the psychological threshold of 100% of GDP, standing at 112%, and, if it can rise by 1.5 points a year, it could come dangerously close to the Italian debt, which stands at 138%. In addition, the French public deficit in 2023 reached 5.5%, exceeding the commitments made by the government and exceeding the 3% limit set by the European Stability Pact. Moreover, the sum of French public and private debt amounts to 320% of GDP compared to a European average of 236% and Italy's 243%. The debt of French companies amounts to 150% of GDP, compared to 65% for Italian companies.
Following these results, pressure was immediately felt from the institutions that serve the interests of the markets, in particular the rating agencies and the European Commission. Standard & Poor, the most important of the agencies that assess the solvency of a country's debt, had already downgraded France's government bonds in 2012 from a rating of AAA (highest confidence) to AA. In May 2024, before the European elections, it assessed France's rising debt and deficit and further downgraded government bonds from AA to AA-. Moreover, another of the top three rating agencies, Fitch, had already downgraded French debt to AA- in April 2023.
Analysts at Standard & Poor are concerned about the 2025 budget law that is expected to pass through parliament in early October and that is expected to enshrine the continuation of Macronian restrictive public spending policy, which is not entirely a foregone conclusion given the weakness of a possible coalition government, not to mention a government in which Melenchon plays a major role.
Standard & Poor says: “The resulting government will struggle to implement meaningful policy measures and will face the lingering risk of a vote of no confidence”. In the face of this situation of uncertainty, again according to the rating agency, there is clearly a possibility that the spread between OaT, French government bonds, and Bund, German government bonds, will rise to 70 basis points. According to another analyst, the interest rate differential on government bonds with Germany is “set to rise gradually, increasing the cost of French debt and contributing to the weakening of the French economy”.
As for the weakening of the French economy, it should be noted that France consumes much more than it produces.
In fact, it imports far more goods than it exports, so much so that it has been running a trade deficit since 2003 and that the 2023 deficit amounts to $137.4 billion, while Italy achieved a trade surplus of $37.3 billion in the same year. France has been able to sustain its welfare state and high trade deficit, now compounded by high public debt, by draining wealth from Africa, thanks to the CFA franc, a currency widespread in former French colonies and controlled by Paris. Recently, however, France's grip on Africa's former colonies seems to be waning. The West African countries under French influence decided a few years ago to abandon the CFA franc for another currency, the ECO, which is expected to come into force in 2027, and which could be pegged to the Chinese Renminbi Yuan. In addition to this, more and more African countries in the area of French hegemony are breaking away from French tutelage to establish trade and politico-military agreements with Russia and China, which are replacing France on the Dark Continent. The last piece of Françafrique (the French area of influence) that France lost recently was Niger, where the French company Orano lost its licence to exploit a maxi mine. The loss of Niger, to Russia and China, is particularly serious, because the African country supplies 25% of the EU's uranium imports, a mineral that is essential in particular for the operation of French nuclear power stations, which represent the transalpine country's largest source of energy production.
Another of France's shortcomings is the strong deindustrialisation that has taken place in recent decades, causing the French manufacturing sector to slip from second to third place in Europe behind Italy. Deindustrialisation is driven by a policy of strong capital export through Foreign Direct Investment (FDI). In 2022, the stock of outgoing FDI, from France to abroad, amounted to USD 1,525 billion, or 53.53% of GDP, while the stock of incoming FDI, from abroad to France, amounted to USD 897 billion, or 32.22% of GDP.
France, therefore, is in a situation of structural crisis, which, internally, is reflected in the continuing strong popular mobilisations against the government's austerity measures and the weakening of the industrial base, and, externally, in the loss of influence in the Françafrique. The political uncertainty brought about by the last elections is also a product of this crisis. It is no coincidence that the popular vote turned towards the extreme wings of the political landscape, on the one hand, to the right, towards Marine Le Pen's RN, and on the other hand, to the left, towards Melenchon's LFi. Macron's centre was penalised, even though, thanks to the double-round electoral system, it managed to come second, after the NFP, in terms of the number of seats in parliament.
At this point, the constraints placed on state policy by the markets and the EU come into play. The markets influence a country's domestic policy with investments in government bonds, determining with them the differential, or spread, between the interest rates guaranteed by French OaT and those guaranteed by German Bund. Thus, as international investment in OaT decreases, the yield on these increases in an attempt to attract new investment and, as a result, a greater part of government spending has to go to finance interest on the debt. This results in either higher taxes or an increase in debt and government deficit. Neither solution is easily implemented, however, because increasing taxes on the rich, as Melenchon proposes, and increasing debt and deficit are opposed by elites and markets.
The EU, on the other hand, with the debt and deficit constraints contained in the Stability Pact, exercises control over the fiscal policies to be enacted by the state, conditioning the parliament's decisions on the public budget and thus on spending. Therefore, the “external”, supranational constraints will affect the activity of the new government and perhaps its very composition. In fact, should there be an NFP government, it will have to be seen whether and how much the government action will be able to free itself from EU constraints and market pressure.
If, on the other hand, a coalition government is set up, perhaps led by a technical figure, precisely because of “external” constraints, we would have the solution envisaged and desired by the financial markets and French and European big business.
France, therefore, finds itself in somewhat the same situation that first Greece and then Italy found themselves in a few years ago, when the Troika (International Monetary Fund, European Central Bank and EU) imposed restrictive policies of blood and tears on Greece and the EU imposed a commissioner like Mario Monti on Italy. Of course France is not Greece and neither is Italy, which was and is very different from Greece. France is a great imperialist and nuclear power.
One thing is certain, however: France is getting closer and closer to the European South, thus being sucked into the periphery, and less and less part of the dominant European centre, the one around Germany. It will, therefore, be interesting to see if and how the powers outside the French nation-state will manage to bend French resistance to the continuation of the austerity policies whose implementation led to Macron's electoral collapse in the European elections. Equally interesting and important will be to see France's attitude on the issue of the war in Ukraine, since Russia is questioning France's influence in Africa, and Macron's “warlike” exits originate precisely from the competition between France and Russia on that continent.