The Empty Pockets of Paris: What France’s Election Means for National Debt

In early June, voters across Europe cast their ballots in the EU parliamentary election. Besides electing members of the European Parliament, the results of June’s election served as a powerful gauge of the political landscape in each member country—one that, for French President Emmanuel Macron, signaled an emergency. Thirty-one percent of voters in France chose a member of National Rally, the nation’s far-right political party led by Marine Le Pen. Macron’s Renaissance Party block won less than 15 percent.

Immediately afterward, Macron dissolved the French parliament and called a snap election, labeling the right-wing surge “a danger to our nation.” In Macron's eyes, an election victory for his party could ensure five more years of legislative support for his politics, postponing the National Rally presidency that now seemed inevitable. Instead, when the results of the election’s first round of voting rolled in, the National Rally had strengthened, with 33 percent of the vote. As politicians and commentators prepared for a right-wing victory, second-round election results yielded an unexpected result. Despite all previous indicators, the hard-left-wing, led by the New Popular Front coalition, won the most seats of any party.

Chancellor Olaf Scholz of Germany said the outcome was “a relief,” and Prime Minister Donald Tusk of Poland stated Warsaw was “happy.” However, despite the celebration, France has not avoided uncertainty. With these results, no political group holds a majority in France’s National Assembly, and as the country continues to navigate post-pandemic economic stagnation and mounting debt, economists are sounding the alarm.

France faces monumental questions in the aftermath of the unlikely election, and at the center of them is the fate of its debt. With an uncertain future, analysis is crucial to determine the future of the French deficit and what it could mean for both the country and the continent.

Republic at Risk

While a 2024 snap election appeared suddenly on the national forefront, a debt crisis did not.

France, like many developed nations, has normalized funding governmental operations through deficits. In fact, France last ran a budget surplus in 1974, making 2024 the 50th straight year of deficit spending.

This history has led many—including National Rally leader Marine Le Pen—to propose policies that disregard the debt issue entirely. The assumption is that if the country has thrived previously despite deficits, it will continue to do so.

However, French debt has a price tag. That cost comes in the form of interest rates, which have soared above three percent since last year. In fact, France’s public audit office reported in August that the country could be “significantly exposed” to economic downturn due to its mounting interest costs.

The solution is multifaceted. For one, paying for these interests requires smaller budget deficits, something former French Finance Minister Bruno Le Maire vowed to address throughout the summer. However, a strong economy is also crucial, especially one producing enough revenue to outpace mounting costs. While the Paris Olympics boosted French growth by more than one percent in the short term, long-term projections of the nation’s economy predict it may fall short, especially given the policy proposals of figureheads like Marine Le Pen.

Whose Debt is it Anyway?

Before the election, top economic watchdogs indicated coming troubles in Paris. In June, US credit rating agency Standard & Poor’s downgraded France’s credit rating from AA to AA-. The European Union openly criticized the country later that month, lamenting its inability to keep its debt low.

In April, International Monetary Fund data predicted that French interest costs would rise. Immediately after Emmanuel Macron called the 2024 snap election, this prediction was proven true. The gap between French and German risk premiums jumped to the highest level since 2017. Even after fears of a far-right victory subsided, premiums remained high, displaying the investor volatility that underscores the precarity of the debt crisis.

Cutting Season

The European Union’s response—its June debt decree placing pressure on France—included enacting an “excessive deficit procedure” (EDP), subjecting the nation to budgetary restrictions until it can stabilize its deficit below three percent of its GDP. The deployment of the EU debt decree, alongside the risk of lost trade opportunities thanks to a low credit rating, has put strict political pressure on France’s government.

Since the European Union issued its warning in June, the government has worked toward the three percent deficit goal. Former Finance Minister Bruno Le Maire told reporters on July 11 that his office would need projected budget cuts of over 27 billion euros (US$29,945,700,000) to get under the three percent requirement, a number that has continued to rise as projections for growth have dwindled. However, given that Le Maire stepped down in September, his pledges to reduce budgets did not come to fruition.

While France’s Court of Auditors blamed Le Maire for the nation’s recent fiscal struggles, the Finance Minister recently passed the baton to Macron ally Antoine Armand, who—alongside new Budget Minister Laurent Saint Martin—must tackle a budget deficit approaching six percent of France’s GDP. For the new governing coalition, a massive challenge lies ahead: creating a cohesive fiscal strategy.

Making it Work

In July, economists advising the government stated that France could reverse its debt trend but had to act swiftly. Their suggestion, cutting over 100 billion euros (US$110,911,500,000) in spending over the next seven to twelve years, was designed to help France retain control of its budget, avoiding the missteps that have endangered its neighbors in Italy.

Given the timeframe of such a plan, however, progress would need to begin now, a task easier said than done. Michel Barnier, France’s newly appointed prime minister, proposed a national budget in early October that includes 40 billion euros (US$43,477,800,000) in budget cuts. However, with tension and pushback from both the left and right, the fate of Barnier’s budget remains uncertain.

Mounting Pressures

The future of the proposed budget is further complicated by tensions within France’s new center-right government. Barnier’s proposed tax hikes and spending cuts have not been endorsed by Macron, who opposes strict austerity measures. Macron believes that economic growth will alleviate France’s deficit, stating: “You need political courage and you have to be fair with your people, but the solution is not to have short-term adjustments in expenditure… It is smarter to work on [creating jobs] than to focus obsessively on short-term measures that can kill growth.” Barnier fears that Macron is not taking the “budgetary emergency” seriously, avoiding potentially unpopular but necessary measures.

However, it may be increasingly difficult for Macron to reject the austerity measures proposed by the prime minister. On October 25, Moody’s downgraded France’s credit-rating outlook from stable to negative, citing “the increasing risk that France's government will be unlikely to implement measures that would prevent sustained wider-than-expected budget deficits and a deterioration in debt affordability.” Moody’s report notably suggested low confidence in the debt policies of the new government: “The risks to France's credit profile are heightened by a political and institutional environment that is not conducive to coalescing on policy measures that will deliver sustained improvements in the budget balance.” The French deficit is projected to reach over six percent of GDP for 2024, over two-times the European Union’s three-percent limit.

Meeting in the Middle?

Data from Goldman Sachs projected that deficit gaps would be best closed by a moderate government, while extreme governance on either side could increase the ratio of public debt to GDP to 120 percent by 2027. Macron’s centrist bloc—situated between the left-wing New Popular Front and far-right National Rally party—may therefore be well-positioned to alleviate the debt crisis, as long as it restrains its more conservative elements.

In July, French centrists worked with the right-wing Republican Right to re-elect Yaël Braun-Pivet as the head of the National Assembly. In preventing left-wing control of the parliament, a very real possibility developed of a government led by Macron’s Renaissance party, despite its loss in the July election. This possibility was bolstered by instability within the New Popular Front, which, immediately after the election, lacked a single leader or clear nominee for prime minister.

This centrist success continued into debates over prime minister nominations. Despite the New Popular Front’s attempt to nominate Lucie Castets in August, Macron declined to choose a new prime minister during the Paris Olympic Games. After delaying the process, he eventually appointed Michel Barnier, a center-right candidate whose selection sparked protests across France.

Despite his controversy, Barnier’s career is lined with experience working with the European Union. This expertise, combined with his status as a centrist, may be the antidote needed for French finance.

Continental Drift

France is not the only country to operate on high-deficit spending. In fact, France’s debt-to-GDP ratio as of 2022 was only the eighth-highest globally. However, for France and its EU neighbors, a constant risk of crisis accompanies collective reliance on a single currency. The worst of this dynamic was seen during the 2010 Eurozone debt crisis, but as early as the creation of the euro, debt was a crucial issue.

The aforementioned excessive deficit procedure levied on France is an example of how EU states’ domestic debt crises do not occur in a vacuum. This concept of EU fiscal guardrails was initially laid out in Europe’s Stability and Growth Pact, a 1997 deal designed to prevent destructive fiscal policy that could dismantle the euro. Today, its effectiveness is debated, given its uneven enforcement. Its 2024 deployment is still a point of tension between Brussels and Paris.

Barnier’s recently introduced budget plan, which seeks to bring France’s deficit to three percent of GDP by 2029, indicates adherence to and respect for EU regulations. Just as governance by the far-left or far-right would exacerbate the debt crisis, it would also strain relations with the European Union. On the right, the National Rally has called for a “profound and irreconcilable divergence” in its relationship with Germany, as well as proposals to cut EU budget contributions by two to three billion euros (US$2,217,920,000 to $3,327,195,000) per year. On the left, the far-left flank has openly called for defying the EU debt-governing pact. These proposals further suggest that a centrist government is best-positioned to address France’s debt crisis.

Zoning Out

Some economists believe that one nation—especially one with as much political and economic power as France—could force its EU peers to deal with its debt on its behalf, expanding the scope of the issue from just France to the continent as a whole.

When this process happened in 2010 with Greece’s deficits, Brussels threatened to remove the nation from the European Union. Fears associated with “Grexit”  bolstered the political pressure necessary to push Athens back into line. However, the bailout of Greece and the seeming inconceivability of forcibly removing France suggest that threatening removal may be ineffective in motivating austerity measures.

If France were to plunge deeper into deficit spending, ignoring EU warnings, how might the European Union respond?

The answer to this question, if asked four years ago, would likely lie in the European Central Bank (ECB) buying back bonds. As a part of its 1.7 trillion euros (US$1,885,410,500,000) stimulus program initiated during the pandemic, the ECB offered to purchase bonds from nations deep in deficit spending to help offset the cost of economic rescue from COVID-19. The program, which helped keep Italy afloat amid its debt crisis throughout the past half-decade, ended this year, making its deployment in France unlikely.

Besides the purchase of bonds, the ECB has a newer trick up its sleeve: the Transmission Protection Instrument (TPI). The TPI, approved by the European Governing Council in 2022, would pay back a struggling nation’s public-sector securities with maturities between one and ten years. Given the makeup of France’s debt portfolio, such a tool would seemingly be the perfect solution for the ongoing crisis. However, the TPI was never intended by the European Union to be used in countries facing excessive debt procedures.  Therefore, if France fails to reduce its debt ratio under three percent of GDP, TPI deployment would be unprecedented. That said, some reports state ECB officials are privately confident that the TPI can still be legally justified for use in France, despite the EDP restricting the country.

Despite this optimism, the relative infancy of the TPI program means its effectiveness cannot be assured. If the TPI does not succeed, and Paris remains at odds with Brussels, could France leave the European Union?

Looking Ahead: Frexit and the Balance of Power in EU Politics

Ever since the 2016 referendum on the United Kingdom’s exit from the European Union, questions have swirled about “who might be next” to leave. For France, that possibility seemed to center on the National Rally, whose platform has openly supported such ideas in the past. However, without a National Rally majority, a new type of “Frexit” may be entering the European lexicon: one built instead on economic terms.

The EU parliamentary election that kickstarted this entire process saw France’s centrist party lose 25 seats in the European Parliament. Despite Macron’s attempts to retain power in domestic and EU politics, the rise of the far-right and the debt crisis pose substantial obstacles.

With tensions over Ukraine and a split over China, a crossroads of leadership in Europe is becoming abundantly clear. If France is not a leader—as its debt crisis and divergence from EU rules would imply—how can the European Union function, and who will fill this power vacuum in EU politics?

Threatening another euro crisis, France could find itself playing the role of “spoiler” very soon.