France’s political crisis shows no sign of abating. this week, after just 27 days in office, means the country is set to have an eighth prime minister in the space of five years.
Although President before the week is over — potentially fending off the need for new elections — the political turmoil comes with major consequences for the EU’s second-largest economy.
As happened in 2024, it means the 2026 budget may not be agreed in time to be debated and passed by the end of the year. due to political instability, meaning the old budget was used until a new budget was finally agreed in February.
Although that short-term solution prevents the risk of a US-style government shutdown, it does nothing to deal with France’s long-term economic problems, namely its debt and public finances.
The debt problem
In the aftermath of the latest prime minister resignation, rating agencies issued fresh warnings about
Fitch, which dropped France into a single A rating last month, said the political situation meant a resolution of the country’s fiscal problems looked unlikely.
Meanwhile S&P Global emphasized the need for France to implement a budget which enabled it to comply with its EU treaty obligations, specifically referring to the fact that France has flouted the strict borrowing and debt rules from the EU’s Stability and Growth pact for some time.
During Macron’s period in office since May 2017, public spending has climbed significantly while he also brought in deep tax cuts. The country’s national debt has increased by more than €1 trillion ($1.17 trillion) as a result, although that has been offset by a 30% increase in GDP growth in that time period.
A preferred measure by economists is debt as a percentage of GDP. France’s has increased to 114% of GDP from a 101% figure in 2017. That’s the third highest rate in the EU, behind Greece and Italy.
France has not balanced its budgets for decades and typically outstrips other OECD countries when it comes to public spending. However, recent crises such as the pandemic, and a series of has led to a surge in spending which has led to ever wider budget deficits.
but is now at 5.8% and has been rising. The ongoing political instability, which came after Macron called snap elections in the summer of 2024 in an attempt to stave off the right-wing National Rally (RN), has made grappling with the fiscal problems harder still.
Those elections led to an even more divided national parliament, with no political bloc holding an absolute majority — cementing the present instability.
Alexandra Roulet, an economist with INSEAD Business School, says the spending during the recent crises, combined with the tax cuts, are the main reasons behind the debt surge.
“These policies have proven disappointing in terms of their effects on the French budget,” she told DW. “The hope was to spur investment and boost the economy in such a way that it would lead to a growth in fiscal revenue despite the decrease in the tax rate but we haven’t seen this happening.”
The Italian job
Yet if the French political scene does eventually stabilize, some experts do see a model for it to follow in terms of
Although its neighbor still has a higher debt-to-GDP rate than France, at 138%, Melanie Debono, senior Europe economist with Pantheon Macroeconomics, says the country’s “fiscal situation has improved significantly in recent years,” highlighting that its budget deficit has fallen to 3.4%, close to the prescribed EU rate of 3%.
Italian Prime Minister recently announced that she expected Italy’s deficit to fall to 3% of GDP this year, which would allow Rome to exit the EU’s program for countries with excessive deficits earlier than expected.
Speaking with DW, Debono said the Meloni government has been “prudent,” cutting construction bonuses and making efforts to collect unpaid taxes, while still managing to cut income taxes and business taxes.
She sees similarities in the Italian and French fiscal situations “in the sense that both suffer from structural challenges related to chronically high, and rising spending and future liabilities, and a weak supply side in the economy which is struggling to raise enough revenue to cover committed spending.”
However, while the Italian situation has been improving, France’s has been getting worse. due to a continued rise in spending, and weakness in tax revenues,” she said.
In terms of direct things France can learn from Italy, she thinks the different political systems don’t allow for easy comparisons.
“It is not clear to us that the relative stability in Italy can be used as a guide for what France should do,” said Debono. “France is not being helped here by the setup of the Fifth Republic in which the president and parliament easily can end up fighting each other when the latter does not have a majority to support the policy of the former.”
However, she highlights how Italy has managed pensions since the sovereign debt crisis in the early 2010s, raising the age by three months every two years, except in certain special years when the increase has been frozen.
France could follow this example, argues Debono, but highlights that Paris needs a lot more than pensions reform to get closer to the EU 3% target. “France needs radical spending cuts and/or tax increases.”
Italy a model of reform?
which could set off the next financial disaster in Europe. Back in 2018 and 2019, its combination of perennial political instability and dizzying debt levels was a dangerous cocktail now familiar to French ears.
At that time, forces near the political extremes, such as the populist Five Star Movement (M5S) and Lega, openly flirted with the idea of pulling Italy out of or the EU as a whole.
In the end, it was Meloni and her Brothers of Italy party who cemented power and have been in place since October 2022. Meloni’s government is being praised for its fiscal discipline, surprising many with how they have upended the country’s image for financial management.
France has also had a major force of the right trying to get into power for years now. Yet Debono says that if the National Rally were to eventually get in power, there is no guarantee that they will practice fiscal discipline.
“RN are tax/spending cutters as per their program, but they’re likely to mostly cut taxes and find it very difficult to cut spending,” she said.
Edited by: Uwe Hessler
The post Can France learn from Italy to overcome its fiscal crisis? appeared first on Deutsche Welle.
