A vote of no confidence triggered by France’s budget problems led to the collapse of the French government. Camilla Locatelli You write that France’s fiscal problems offer important lessons for the rest of Europe.
On December 4, the French government collapsed after Prime Minister Michel Barnier lost a vote of no confidence. The vote came after Barnier used Article 49, paragraph 3 of the French Constitution to force the Social Security financing plan through parliament without a vote.
The government, which has only been in power for three months, is at a difficult crossroads in handling the budget. The national deficit in 2024, which was initially expected to be 4.4%, was later revised upward to 6.1%. The amendments have raised serious questions about the state of France’s public finances, as well as how the deteriorating budget situation could have been under scrutiny for so long.
Weak supervision and optimistic outlook
To international observers, it may seem strange that budget figures have been found to be unreliable. However, it is well known to French observers that recent French budget estimates tend to be overly optimistic. On several occasions over the past decade, the French finance ministry has overestimated growth prospects, particularly with regard to compliance with EU fiscal targets.
My doctoral research focused on this issue. I found that France was able to avoid much of the pressure of EU fiscal rules by leveraging the technical estimates used in the EU fiscal surveillance system in the 2010s. The technical expertise of the French Treasury and the relative weakness of its domestic monitoring mechanisms allowed France to persuade the European Commission that its budget figures were realistic, despite clear signs that French growth had been overestimated to justify higher public deficits. .
The supervisory body, known as the Haut Conseil des Finance Publiques (HCPF), was established in 2012 to monitor government budget figures under the EU’s fiscal compact, but its capacity and independence are limited. A lack of external and domestic oversight has led to misrepresentations of France’s budget situation. A parliamentary committee is now investigating how this situation was allowed to unfold.
What is it now?
France currently faces three major challenges. First, the tax base was reduced by reducing business taxes in the name of competitiveness. During his first term, President Macron lowered the corporate tax rate from 33.3% to 25%, lowered the mandatory tax paid by French companies, and abolished the wealth tax. These tax cuts had a short-lived impact on growth but reduced revenues. “It wasn’t a bad strategy in principle, but it didn’t work,” Jean Pisani-Ferry, one of the people who developed this approach, said in a recent interview.
Second, Macron’s pledge to spend “whatever it costs” during the COVID-19 pandemic has led to an explosion in public spending, partly financed through the EU’s NextGenerationEU program and a massive domestic spending plan called France Relance. Maintained by .
This protected the French economy through the worst of the crisis, but it came at enormous costs and was largely focused on cushioning businesses from the most severe and short-term effects of the shock. This spending has not addressed the French economy’s structural problems of low growth through long-term interventions, including large-scale public investments.
Third, after two decades of blind trust in financial markets, France is now experiencing higher borrowing costs. In September, French bonds traded at higher yields than Spanish bonds for the first time since 2008. In October, credit rating agency Moody’s downgraded the French economic outlook from ‘stable’ to ‘negative’.
In late November, France’s borrowing costs hit an unprecedented high, close to levels reached at the peak of the country’s debt crisis and surpassing Greece’s levels for the first time. This reflects a loss of confidence in French public finances in the eyes of international creditors and will make resolving the current crisis more difficult.
Lessons for Europe
These challenges left Barnier faced with the task of creating a budget that could address all of them simultaneously. He had to find a solution without the support of the political majority, either the far left or the far right opposition. He tried to achieve this through an austerity budget that would cut public spending by €60 billion. No wonder he failed to do so, and that France’s fiscal crisis has now turned into a political crisis.
But the chaos surrounding the French budget also highlights many of the problems with the EU’s fiscal governance system. The lesson from this experience is not that the EU should make its rules stricter for countries like France, but that the strict fiscal rules of the past decade have failed to achieve both fiscal discipline and fiscal oversight. EU rules have also failed to create confidence in financial markets, which are unstable and linked to political dynamics rather than financial fundamentals.
With growth prospects looking bleak for most eurozone economies and the EU’s fiscal rules coming back into effect (even for Germany, a leading advocate for stricter rules), France’s experience has raised questions about whether these rules will be fully enforced. A reevaluation is needed. This is the best way to address the current economic challenges facing the EU economy.
Note: This article gives the views of the author and not the position of EUROPP (European Politics and Policy) or the London School of Economics. Main image source: Antonin Albert /Shutterstock.com
