De redactie van NRC selecteert de beste artikelen uit The Economist voor een breder perspectief op internationale politiek en economie.
The French-size problem at the heart of the EU.
Dit artikel komt uit The Economist
To be European is to experience fine cuisines, walkable cities and constant nagging about the many ways in which your economy is falling behind America’s. In recent years weighty reports bemoaning Europe’s lagging productivity have become a literary genre in their own right. So news in recent weeks that America’s government debt had passed $40trn, raising questions about how long bond-market types will keep funding its persistent budget shortfalls, have been greeted in some European quarters with a degree of Schadenfreude (or whatever the Greek equivalent is). This is a continent that knows a thing or two about spiralling debt crises, after all. How refreshing it might be if the tables were turned, and Europeans could be the ones making recommendations about how politicians in Washington should be running their economic affairs.
Indeed, Europe looks at first glance to be in markedly better fiscal shape than its transatlantic rival—a rare case in which economic data seemingly favour the old continent. The total debt pile of governments in the European Union amounts to a mere €15.7trn ($18.2trn), in an economy not much smaller than America’s (Europeans are poorer but there are more of them). Two decades ago both places had debt-to-GDP ratios of around 65%. Now America’s has swollen to over 120%, and the IMF thinks it will be north of 140% by 2031. Europe’s is at „just” 83%, and its future is essentially flat—still in vaguely prudent territory. But Europeans tempted to subject those stateside to sermons about economic management (does America need a Draghi report of its own?) should hold their fire. For though America has the bigger debt, Europe has the bigger debt problem. America’s advantages include the world’s reserve currency and a growing economy. Europe’s disadvantage can be summed up in one word: France.
De redactie van NRC selecteert de beste artikelen uit The Economist voor een breder perspectief op internationale politiek en economie.
Comparing European and American debt is trickier than the headline numbers suggest. America owes too much, no doubt, but Europe owes it in all the wrong places. When it comes to handling interest payments on trillions in federal bonds, America is stronger than the sum of its parts: the entire union stands behind every dollar owed. In Europe, by contrast, most borrowing is contracted by 27 member states, each of which must repay its own debt lest the union as a whole totter. That makes the EU (or at least the euro zone at its heart) only as strong as its weakest link—as Greece once showed when it threatened default. Lots of countries in the EU have manageable debt piles, notably Germany and its northern neighbours. Others, like Greece and Spain, have high debt but enough growth to appease the bond vigilantes. France stands out for having neither fiscal space (its debts amount to 118% of GDP) nor growth (an underwhelming 0% in the most recent quarter).
As a result, interest rates on French ten-year bonds have now reached 4.2%, their highest in 18 years—higher even than Italy, the continent’s traditional problem child. In part this is a global dynamic: governments everywhere are paying more interest, as investors fret over inflation and geopolitics. But the spread between French and German bonds, the extra interest France has to offer lenders to entice them to hold its riskier debt, is now close to one percentage point. The fragmentation of rates among EU countries is still nowhere near the levels seen during the euro-zone crisis of the 2010s. That is largely thanks to the European Central Bank, which has since signalled it might step in if some euro-zone government’s borrowing costs were to rise too high. But the central bank’s largesse is meant to be conditional on that struggling government agreeing to make a serious effort at enacting reforms and remedying its fiscal mess.
Politics tends to interfere with such sound policymaking, and Europe has a surfeit of politics coming its way. In 2027 national elections are due to be held in France, Greece, Italy and Spain, four debt-laden countries. Fiscal discipline will no doubt slip as voters are showered with goodies. France again stands out. The front-runner in the polls is Marine Le Pen, a populist who once campaigned to leave the euro. More recently, the head of her party suggested the ECB could be cajoled into helping in some way. Her opponent on the populist left, Jean-Luc Mélenchon, has announced he wants to „set fire” to a portion of France’s government bonds. Even among level-headed centrists, nobody is suggesting a return to deficits of 3%, which EU treaties mandate, any time soon.
Any suggestion that France is the next Greece is hyperbolic nonsense—at least for now. But French profligacy is reshaping Europe nonetheless. America can run large deficits in part because its vast stock of treasury bills are denominated in the world’s reserve currency, and are thus a useful haven for nervy investors in choppy times. Europe would love to capture some of this „exorbitant privilege”. One way it tried to do so was by getting the EU to issue its own federal bonds, jointly backed by all 27 countries. The bloc started doing so on a large scale in 2021, to finance its pandemic recovery plan. Many hoped to issue more such debt in future to finance defence spending, in keeping with calls by Emmanuel Macron, France’s president, for more European „strategic autonomy”.
But continued French budgetary drift has probably put paid to further joint borrowing. The bigger the spread between French and German bond yields, the bigger the implicit subsidy flowing from Berlin to Paris (and more generally from the fiscally flush to the skint across the EU) whenever joint bonds are issued. Germany, never keen on extending the idea in the first place, now has a sizeable argument against it: who would volunteer to run a joint tab with a spendthrift whose creditworthiness is doubted by markets? French fiscal incontinence has long had a cost for the French. Now other Europeans are paying for it, too.
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