The French Economy Has a Big Problem

5 min read

Ah, France.

The country that gave Europe (and to the world) invaluable contributions. Haute couture, ballet, fine dining, the Declaration of the Rights of Man and Le Citoyen.

Its recent contribution is far less glamorous: a soaring public debt.

In just seven years, President Emmanuel Macron, along with his trusted sidekick, Minister of Finance Bruno Le Maire, nicknamed “Mr. Trillion”, have managed to create an additional €1 trillion in debt.

French public debt reached €3.228 trillion at the end of June 2024.

A historical result in many senses, especially as France needed several decades to collect the €2,2 trillion debt Macron inherited from his predecessors. The Le Maire-Macron needed only 7 years to add an additional 1 trillion (and counting). While the COVID-19 pandemic gave them a convenient excuse for much of this extra spending, a newer and more sinister culprit has emerged: high energy prices fueled by the Russian invasion of Ukraine.

The French masterplan to conquer this obstacle was to pour money into the system. But as it turns out, even if you throw billions at a problem, it doesn’t necessarily go away.

Let’s take a deep dive into the slow-motion economic disaster that’s unfolding in France, shall we?

Before we delve into the recent energy woes, let’s rewind to the beginning of the Macron era.

When Macron was elected in 2017, he promised to get France’s finances in order. Spoiler alert: that didn’t happen. Macron’s government, with Le Maire at the helm of the economy, kept spending like a 19-year-old with a credit card and no concept of interest rates. Then, when COVID-19 hit in 2020, the floodgates opened even further.

To be fair, France was not alone. Across Europe, governments ramped up health expenditures and rolled out massive social support programs to keep people afloat during lockdowns. But France took it to another level, with public debt climbing to over €3,2 trillion. The peak of the pandemic saw government spending soar, with COVID-related expenditures adding up to tens of billions, primarily in health care and unemployment benefits.

It was expected. It was necessary. But what wasn’t expected was the way energy prices would come back to bite.

When Russia decided to invade Ukraine in 2022, Europe had to give response because the public opinion requested it.

If leaders in Moscow believed that European capitals would turn their heads in another direction because of their energy dependency, they miscalculated. Combine American pressure with some European capitals’ self-sacrificial behavior and you end up with the sanctions system now in place: EU members chose to fulfill their moral obligations at the expense of their own economic interests.

France, which generates a substantial portion of its electricity from nuclear energy, was supposed to be insulated from the worst of it. But life has a way of ruining even the best-laid plans.

In 2022, a series of technical issues at French nuclear plants led to reduced output. France found itself increasingly reliant on imports of natural gas and electricity—just as energy prices in Europe skyrocketed. This, together with German efforts to shut down nuclear power plants (a thing that annoyed Macron probably more than any German “misstep”) and the connected European energy market created a new reality all around Europe.

It was in that moment that the French government decided it was time to spend its way out of the problem.

The rationale behind the decision might have been that Paris hoped that the problem will solve itself sooner, or some other miracle helped them. Either way, the motivation was clear: to avoid citizens starting to feel the economic effects of the war. Rather than allowing the market work and face the likely disastrous political consequences, the French government rolled out energy subsidies. According to official data, Paris spent nearly €100 billion in energy subsidies until 2023.

Despite all those billions, energy prices still soared.

The numbers are staggering. In 2022, there was a period when wholesale electricity prices in France jumped to over €500 per MWh, up from around €50 per MWh just a couple of years earlier. Meanwhile, natural gas prices increased by more than fivefold. The collective groan of French industry rattled the windows of Elysée Palace as energy costs ate into profits and forced manufacturers to shut down or relocate.

As a side note, while French factories are shutting down or scaling back operations because they simply can’t afford to keep the lights on, the U.S. is sitting pretty. According to the Draghi Report, the difference in energy prices between the U.S. and Europe is stark. U.S. energy prices have remained relatively stable, thanks to domestic production and a favorable geopolitical position. Meanwhile, European industry is paying three to five times more for the same amount of energy. Thus, American manufacturers are expanding, while their European counterparts are struggling to compete with them, to a great extent because of the energy prices.

As if that weren’t enough, high energy prices have also fueled inflation in France, just like in all Europe. In 2022, inflation hit 6.2 percent, the highest level in decades, driven in large part by soaring energy costs. And when energy prices go up, so does the cost of pretty much everything else.

But energy prices aren’t the only culprit.

Remember that €100 billion France spent on energy subsidies? Well, it didn’t just fall out of the sky.

The government had to borrow that money, and higher public spending also inevitably leads to higher inflation. It’s a vicious cycle: the government borrows to subsidize energy, which fuels inflation, which forces the government to borrow even more to provide additional subsidies or social supports.

In addition to this, the government spending was fueled with the salaries of the thousands of new public servants that the Macron’s led French state hired to support the main goal: hiding the catastrophic state of economy and reining in the rising unemployment.

By 2023, inflation had moderated somewhat but remained stubbornly high, hovering around 5 percent. Meanwhile, public debt continued to climb.

As of 2023, France’s debt-to-GDP ratio stood at a whopping 113 percent. To put that in perspective, that’s worse than Italy’s—a country that has traditionally been Europe’s poster child for fiscal irresponsibility. Not necessarily a feat Paris is proud of.

Of course, energy subsidies weren’t the only thing adding to France’s financial woes.

The war in Ukraine has led to a host of other expenditures. France, like much of Europe, has increased defense spending as a direct response to the Russian threat. In 2022, France’s defense budget was €44 billion, and it’s set to increase by at least €3 billion annually in the coming years.

On top of that, the French government has rolled out various social support programs to help people cope with rising inflation. From fuel vouchers to direct cash payments, these programs are designed to prevent the kind of social unrest that has a nasty habit of boiling over in France. You might recall the Gilets Jaunes (Yellow Vests protests). Macron does remember, beyond any doubt, and he’s doing everything he can to prevent a repeat.

But all this spending comes at a cost, and that cost is even more public debt.

And here’s the real kicker: despite all the evidence that high energy prices are slowly killing the European economy, many are still in denial, nobody seems willing to do anything about it.

At this time, it would probably be a political suicide for many (e.g. Macron) to openly admit that Europe has an energy price problem. It would mean acknowledging that the green transition isn’t going as smoothly as planned. It would mean admitting that the sanctions on Russia, while morally justified, are economically painful. And it would mean telling voters that there’s no easy solution in sight. Thus, many European leaders are still bragging about how fine is Europe without Russian energy, while still hoping that sanctions are more painful for Russia than to the EU. The industry begs to differ.

So, instead, voters get more subsidies, more borrowing, and more Band-Aid solutions to a problem that requires surgery. Energy prices are the cancer of the European economy, but instead of treating it, politicians are slapping on some painkillers and hoping for the best, as France did for the last years.

Not to mention other effects of the war in Ukraine that France must suffer, such as losing its special role in the Sahel Region (a main source of the French nuclear power plant fuels, by the way), so, the story can continue in the next years.

France, once the shining star of the European economy, is now facing a slow and painful decline. It is unlikely that the recently initiated tax reforms and promised cuts in public spending will heal the wound and not just add a different layer of bandages.

But hey, at least Europe’ll still have cheap wine, because French wine consumption fell drastically, too. And if Chinese sanctions start to bite, we’ll have an abundance of brandy, too.

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