The likely collapse of France’s government won’t force it to seek support from the International Monetary Fund, but the country absolutely has to get its public finances under control, European Central Bank President Christine Lagarde warned Monday.
“The risks of any euro area government falling is worrying,” Lagarde said in an interview with France’s Radio Classique. “Markets evaluate risks in their totality and we have seen the country risk increase in recent days.”
Lagarde said she is very closely monitoring French bond spreads — the premium investors demand for holding French debt rather than German equivalents, which are the benchmark for European bond markets. That spread hit its highest level for the year last week.
The French minority government is widely expected be toppled in a confidence vote on Sept. 8, as opposition parties ignore Prime Minister François Bayrou’s appeal to them to support his 2026 budget plans.
Bayrou’s finance minister, Eric Lombard, had warned that a collapse could spark so much turmoil that the IMF would have to intervene, though he quickly backpedalled. Lagarde, who was in charge of the IMF during the bailouts of Greece and other eurozone countries a decade ago, suggested this talk was overdone.
She argued that the IMF typically only responds to requests for help from countries that have immediate problems with their balance of payments and which cannot pay their debts.
“That isn’t the case with France today,” she said, adding that the IMF “would probably say that the conditions aren’t met” and would instead tell Paris to “get organized … and put your public finances in order.”
“It is obviously necessary the direction, as regards terms of debt service and debt volumes, be headed downward and that they come back into the limits of what has been agreed” at a European level, Lagarde stressed.
EU rules limit a country’s budget deficit to 3 percent of gross domestic product, but France’s has been well above that level since the pandemic. It is set to stay above 5 percent of GDP this year, while Bayrou is looking for a way to get parliament to approve a budget that would close the gap to 4.6 percent next year.
More troubles abroad
Lagarde also expressed concerns over troubles brewing across the Atlantic, where U.S. President Donald Trump has launched an unprecedented attack on the U.S. central bank in an effort to push interest rates down.
Trump has attempted to fire Federal Reserve Governor Lisa Cook on the basis of allegations — so far untested in court — that she committed mortgage fraud. Trump has openly boasted that replacing Cook with an appointee of his own would ensure a majority on the Fed’s board willing to do his bidding. Central bankers and independent economists across the world have warned that this could undermine the Fed’s independence from government, which they say has been a cardinal factor in creating prosperity over decades.
A lawyer by training, Lagarde said that Trump would find it “very difficult” to take control of the U.S. central bank but warned of dire consequences should he succeed.
“If he did manage to do so, I think it would pose a very serious threat to the U.S. economy and the global economy,” she said. “Monetary policy obviously has an impact on the U.S. in terms of maintaining price stability and ensuring optimal employment in the country.”
By law, the Fed is required to pursue both low inflation and full employment. Fed Chair Jerome Powell said in a key speech last month that the two goals were currently in tension with each other, but appeared open to cutting rates later this year.
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