The French public deficit is spiraling out of control, reaching 5.5% of GDP in 2023 according to the latest data from Insee. This is significantly higher than the government’s initial forecast of 4.9%. Despite this, financial markets have reacted with little concern. In fact, since October, the interest rate on French ten-year bonds has decreased from 3.5% to 2.8%. Following the announcement of the deficit figure, the French rate even slightly declined by 0.02 points.
Sylvain Bersinger, chief economist at Asterès, a economic consulting firm, noted that France currently has no difficulty borrowing money. This is reflected in the narrowing spread between French and German interest rates, with Germany considered to have the strongest public finances in the Eurozone. The gap has decreased from 0.55 points in October 2023 to 0.47 points today. The financial markets seem to be showing leniency towards France’s deficit situation.
The leniency of financial markets can be attributed to the current economic situation. Central banks raised interest rates significantly in response to the inflation surge following the Covid-19 pandemic and the Russian invasion of Ukraine. Now, as inflation eases, central banks are beginning to reverse course. Everyone is expecting interest rate cuts, with the European Central Bank indicating a possible decrease in June. The US Federal Reserve is following a similar timeline. Additionally, the government’s ability to reassure markets by outlining plans to address the deficit is crucial in maintaining investor confidence.
A more structural factor behind France’s ease in financing is the global excess of savings compared to investment opportunities. There is a substantial excess of savings in the world due to aging populations and a lack of viable investment projects in the relatively stagnant European economy. Investors are left with significant amounts of money to invest, leading them to favor government debt which offers guaranteed returns and minimal risk. This excess of savings contributes to the current ease of financing for France and other countries facing deficits.
Overall, the financial markets seem unfazed by the French public deficit exceeding expectations, as evidenced by the minimal impact on interest rates. The global economic environment, with central banks expected to lower interest rates, the government’s commitment to addressing the deficit, and the excess of savings compared to investments all contribute to the current favorable financing conditions for France. Despite concerns raised by the Cour des comptes about the state of public finances in France, the country’s ability to borrow money remains stable due to these factors.
