France facing the deepening of the debt

Public debt is like cholesterol. “There is good debt, which allows productive investment which promotes growth and therefore tax revenues which will allow it to be repaid, explains Hervé Goulletquer, deputy director of research at La Banque Postale AM. And then there is the bad debt, which we use for spending that is not necessarily effective and which we will drag like a ball. “

The problem is that France entered the coronavirus crisis with an already loaded boat and that the “Whatever the cost” advocated by Emmanuel Macron to limit the economic damage has plagued the situation, even if the support measures for companies and households were essential.

“In 2019, the public debt stood at 98% of GDP, which was already in the upper euro area average. In 2020, it should reach 120% of GDP, which would have been considered unsustainable a short time ago ”, underlines Hervé Goulletquer. But is it so bad that we need to be concerned? “In the short term, no, Esther Duflo, 2019 Nobel Laureate in Economics, replied recently in an interview with La Croix L’Hebdo. The State is not “a good father” who must balance its budget from day to day. “

In fact, a state has no obligation to reduce its debt to zero. But he must succeed in doing it “Roll” by convincing the markets to lend it unceasingly, by assuring them that the interest on the loans will be well paid and the debts, having reached maturity, reimbursed. A system that is therefore largely based on investor confidence.

However, until now, Paris has been popular with them. We can even say that the French debt is tearing up: last year, Agence France Trésor raised a record amount of 260 billion euros and plans to invest as much in 2021. Better, “France can issue debt at negative rates up to twelve years of maturity. This means, in concrete terms, that investors are ready to pay to hold French bonds ”, explains Éric Dor, director of economic studies at IESEG, a business school attached to the Catholic University of Lille.

This paradox is explained by the very generous monetary policy carried out by the European Central Bank (ECB) which consists in massively buying back government securities, which raises their prices and therefore lowers their rate of return. This policy has a major advantage: France’s public debt may well increase as a percentage of GDP, the average interest rate – the average of the different rates applicable to bonds issued depending on the year – is constantly falling, which lightens the bill.

In 2020, this average rate was 1.3% and will not rise again as long as the ECB continues its buyback operations, to which it has committed over the next few years. Which bodes well for Paris.

“Under the assumption that the health crisis is under control and that activity returns to normal, the growth rate should exceed the average interest rate, a ratio which guarantees to be able to at least contain the debt, if not reduce it “, explains Éric Dor.

From a strictly economic point of view, public debt, even at this high level, should therefore be manageable in the medium term. But it is counting without the political factor which invites itself in the debate.

In Europe, we can fear that the opposition between the so-called northern countries will quickly resurface. “Frugal”, supporters of budgetary austerity, and Latin countries accused of being “Cicadas”. While in France the prospect of the 2022 presidential election is already sharpening opposition on the sensitive issue of ” who will pay ? “ with, as a dividing line, the priority to be given to reducing expenditure or seeking new revenue.

The idea of ​​involving large companies or wealthy households is constantly coming back to the table, through a re-establishment of the wealth tax or the establishment of an exceptional Covid tax defended by almost all of the left. “The increase in taxes on the better-off will not solve the debt issue, but it is a necessary message to restore social cohesion”, pleads Valérie Rabault, president of the PS group in the Assembly.

“Getting out of a crisis by increasing taxes is a mistake we paid dearly after the 2008 crisis”, retorts Jean-Noël Barrot, economist and MoDem deputy. On this issue, the government’s line is clear. As long as I am minister, there will be no tax increase ”, insists Bruno Le Maire, the Minister of the Economy.

This does not necessarily exclude the search for new resources. There are many ideas: taxes on financial transactions, taxes on digital giants, carbon tax at borders, etc. “Talking about new taxes avoids telling the French that we are increasing those that exist. But it’s still a tax hike ”, underlines a former advisor of Bercy.

The other way to tackle debt would obviously be to play on spending. “The best way to avoid the runaway debt is to limit deficits”, underlines Jean-Noël Barrot, for whom the recovery can go through “Better efficiency of public spending “.

Few are those who assume a wave of austerity, clear cuts in spending. At least for the moment. “The restoration of public finances will take place when the crisis is behind us, but it will happen”, reaffirmed Bruno Le Maire. And one of the ways to prepare for it would be to resume pension reform without delay, he continues to plead.

This relative prudence makes the most alarmists jump, like the centrist deputy Charles de Courson, pillar of the finance committee. “The 20 points of Covid debt is the equivalent of € 17,000 per household. To say that it will be resolved effortlessly is demagogic, he asserts. This will require necessarily difficult reforms in terms of pensions, but also health. “

There remains a radical solution: to write off part of this debt with a stroke of the pen. This is the iconoclastic proposition defended for several months by a small group of French economists.

“The ECB’s monetary policy allows States to borrow at very low costs, which they do not do in sufficient proportions, tense as they are by the weight of their debt. It would suffice for the ECB to agree to cancel part of it for the States to build more generous stimulus plans, in order to rebuild the economy and invest in the necessary ecological transition ”, pleads Nicolas Dufrêne, director of the Rousseau Institute and member of the collective.

This solution appears legally impractical – it would require nothing less than a change in European treaties – and economically risky, according to most economists. “Beyond that, it poses a real question: is the stimulus plan proposed by the government in September sufficiently calibrated, well targeted and in the right timing to create, tomorrow, the wealth that will allow us to pay off the debt? questions, skeptical, Anne-Laure Kiechel, founder of the consulting firm Global Sovereign Advisory. We have passed into a territory where we can no longer afford to be wrong. “


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