Rising deficits rising and widening spread: France scares EU partners

Brussels – France is now starting to get scary. It is said in hushed tones, quietly, but French accounts combined with the political crisis are unsettling its partners. The Economy Commissioner, Valdis Dombrovskis, assures that “the eurozone, so far, has shown resilience” to pressures and shocks and assures that the French situation causes concerns only for “the immediate future.” In short, “there are no signs of a crisis.” However, there are concerns around the table of economic ministers.

“It’s a fragile situation,” Mihaly Varga, Hungary’s finance minister and current chair of the Ecofin Council, acknowledged. The EU’s major economies are also grappling with government instability. “We look at Germany and France,” he admits. Growth in Germany has stalled, and the country is heading to early elections. France is starting to have high deficits, rising debt, and a spread at its highest level since 2012 — exceeding even the yield differential of Greece — with a government to form. “France has more contagion effects in the EU, and we will discuss this,” Varga cuts short, reflecting a state of agitation among partners.

The comparison between France and Greece is being made publicly by the Ecofin chair himself. The reference stems from the performance of government bond yields, with French bonds less attractive than Greek ones. It would be unremarkable if not for the fact that Greece is the striking example of the sovereign debt crisis and the European Union member state that underwent the most substantial bailout, receiving 256 billion euros in loans from 2010 to 2018.

The hope — not even too veiled and explicitly declared — is that France will be able to get its public accounts back on track, reducing imbalances and sticking to the new stability pact, as reformed by the member states. The request comes from the Netherlands, with Finance Minister Eelco Heinen urging Paris to exercise spending discipline and the Commission to act “with the same severity shown to us.” He was referring to the rejection of Dutch budget law due to spending considered excessive and contrary to the line of prudence.

Frankfurt could come to the rescue of French President Emmanuel Macron. On Thursday (Dec. 12), the European Central Bank’s Governing Council meets to decide whether to cut interest rates further. Analysts expect a reduction of 0.25 basis points. If so, the decision could positively affect the rate situation.