Last October, after the forecast for the French state’s deficit this year rose to 6% of annual economic output, Prime Minister Michel Barnier presented a plan to reduce the budget gap to 3% by 2029, as provides for the EU Stability Pact.

Barnier wanted to push part of his plan through parliament through the 2025 budget. In fact, the French prime minister sought to bypass the National Assembly in a parliamentary fiasco that could lead to the collapse of his government. And in case something like this happens, France will be on the verge of not only a governmental, but also an economic crisis.

China is ahead

Until recently, however, the omens for the French economy seemed favorable. This year growth is estimated at 1.1% – at a time when Germany’s GDP is expected to contract by 0.2%. In addition, France’s unemployment rate stands at 7.4%, while inflation has hovered around 2% – two years ago it was still over 5%.

However, these positive figures are not able to cover a fundamental weakness of the French economy, according to Denis Ferrand, head of the economic research institute Rexecode. “Since 2019, French – and European – businesses have lost a significant part of their competitive ability compared to China,” the expert tells DW. “In Europe the cost of production has increased by 25% on average, while in China by only 3%.” As far as Europe is concerned, this condition is due to very high inflation, interest rates, as well as energy prices, especially after the start of the Russian invasion of Ukraine in 2022.

The French economy in a structural crisis

In France, many entrepreneurs are discouraged, as Ferrand reports: “Every quarter we ask 1,000 French small and medium-sized entrepreneurs about their investment behavior. At the end of October, only 36% of respondents said they wanted to continue their investments – 45% wanted to postpone them until later, while 18% did not want to invest at all. This is a trend that had already been observed since the beginning of the year, with the early parliamentary elections, however, it became much more intense.”

In a poll by the British Ernest & Young (EY), in which 200 top executives of international companies participated, it was found that about half of them had decided to limit or postpone their investment plans in France.

The negative mood of the investors is also confirmed by Philippe Drouon, a lawyer specializing in bankruptcy law at the Hogan Lovells company. “Currently it is very difficult to find buyers for companies that are in the process of bankruptcy. And at the moment I am working with 60 such companies – that is to say, a lot,” the lawyer told DW. “The number of bankruptcies is approaching the levels reached during the international financial crisis of 2008.” An estimated 65,000 businesses are expected to file for bankruptcy this year – 9,000 more than last year.

This is partly because many businesses are now being forced to repay loans they took out during the pandemic. At the same time, however, it is also the result of “a structural crisis affecting many sectors, such as the automotive industry due to the transition to electrification, but also the real estate sector, where there is less demand for offices because telecommuting has become so popular”. In addition, high interest rates in the capital market have been an obstacle to attracting investment.

“A monumental mistake”

An-Sophie Alsif, chief economist at the consulting firm BDO, does not believe that the economic situation is so dramatic – without, however, taking into account the political factor.

“There is an improvement in macroeconomic indicators, but in the event that the government falls and there is no budget for 2025, we could slide straight into an economic crisis – and such a development would be catastrophic,” the economist explained to DW. “This would signal to investors that France is unable to implement a plan to repay its debts.”

In the event that the censure motion leads to the collapse of the Barnier government, this would mean that for the near future the 2024 budget would again be implemented. “But this was the budget with which our budget gap ended up reaching 6 %”, stresses Alsif. “Macron’s decision to dissolve parliament was a monumental mistake – and now we are forced to have a government with a coalition, which simply cannot work in France. The political situation in the country is absolutely unstable.”

“It is an exaggeration to say that France is threatened to go into a phase of financial crisis,” comments Christopher Debic, an investment advisor at the Swiss asset management company Pictet Asset Management. “Something like that would mean that France is no longer able to refinance its debt – as has happened since 2009 with Greece.”

The economist points out that “investment fund managers in the US tell me that they have long factored in political risk and the spread – that is, the difference in ten-year government bond rates compared to Germany – is around 80 basis points. France currently pays 0.8 percentage points higher interest rates than Germany. And this differentiation is acceptable.”

Is France “too big to fail”?

Interest rates on French 10-year government bonds are currently around 3%. But for the first time in history they surpassed those of Greece. And until the early parliamentary elections were announced, the spread was around 50 points.

It is these figures that worry Ferran: “Until now, France has always claimed that it is “too big to fail”, that is, it is too big economically for the rest of the European countries to let it go bankrupt,” says the economist. Brussels, however, people are slowly losing patience with France’s inability to repay its debts’ – a debt which is now greater than the French GDP.

Edited by: Giorgos Passas