Weekly update - France is not without its strengths

The rise in French sovereign interest rates and in particular the widening of the gap with German rates are reviving questions about the trajectory of public finances. In a context marked by slower growth, high debt and persistent deficits, the markets are more demanding of the French signature. This development marks the return to the forefront of budgetary sustainability issues. However, the current situation is significantly different from that of the economies that were at the heart of the eurozone crisis in the early 2010s. While France's fiscal challenges are real, the economy also has several resilience factors that deserve to be recalled..

Growing tensions over the French debt.  The return of persistently higher interest rates is changing the environment in which public finances operate. For more than a decade, the low cost of financing has allowed governments to take on debt at a lower cost. The rate hike of recent years, which has accelerated again in recent weeks, automatically leads to an increase in the interest burden. This development comes at a time when France continues to post a high public deficit. In a context of relatively weak growth, investors are more concerned about the country's ability to stabilise and then reduce its debt. The recent widening of the risk premium compared to Germany (to 110 basis points) reflects a questioning of the credibility of the French fiscal trajectory.

Shock absorbers that distinguish the French situation. However, these tensions should not hide a key difference between today's France and the economies that had gone through the sovereign crises of the early 2010s, At the time, , several countries on the periphery of the euro area had large public and external deficits, making them highly dependent on international financing. When these capital flows came to a halt, the adjustments were particularly violent. France does not currently have this type of external vulnerability. Its current account deficit remains limited and the economy does not depend heavily on short-term foreign financing to ensure its functioning. This characteristic reduces the risk of a "sudden stop", i.e. a sudden halt in capital flows that could cause a financial crisis. The abundance of domestic savings is another factor of resilience. French households maintain a high savings rate, providing the economy with a large pool of financing. This ability to mobilize abundant national savings distinguishes France from many economies that have experienced financing difficulties in the past. Finally, the financial system now appears to be robust, thanks in particular to the regulatory and prudential reinforcements implemented for more than a decade.

An environment that reinforces the need for fiscal adjustment. The presence of these shock absorbers does not mean that France can ignore its imbalances. Persistently higher rates imply a gradual increase in the debt burden, reducing fiscal room for manoeuvre. An increasing share of public resources is therefore expected to be devoted to financing past commitments rather than to investment or policies to support growth. In this context, budgetary choices are becoming more constrained and trade-offs more delicate. Markets could also continue to demand higher remuneration as long as there is no lasting improvement in public accounts. The most likely scenario is therefore not that of a financial crisis comparable to those observed in some European countries fifteen years ago. Rather, the main risk is that growth will be held back for a long time by the rise in the cost of debt and by the efforts needed to restore public finances.

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