France reported a few weeks ago that its already exorbitant budget deficit of 4.9 per cent of French GDP would be breached. And that was no lie. According to statistics agency Insee, the budget for 2023 will go into the minus by a whopping 5.5 per cent. And with that, the chances of France becoming a second Italy are rapidly increasing.
Maastricht: Never heard of it!
Below are the budget deficits of France and Italy, as calculated by Eurostat, for France and Italy. Since the Great Financial Crisis, France has managed to keep its budget deficit within the once-important 3 per cent of GDP for only one year (2018). That has been rounded in 6 per cent of years.
Once upon a time, the Maastricht criteria, set in 1991, were the holy grail of debt sustainability. Besides a maximum budget deficit of 3 per cent, there is also a limit of 60 per cent public debt as a percentage of GDP to keep debts from falling out of line. Oh boy, how the world has changed.
Back to the chart. Italy managed to contain its budget deficit in no less than nine of the 16 years since 2008. Now, this did require a «European sovereign debt» crisis in which there was open speculation whether Italy should return to the lira. Not surprisingly, especially in the years following that crisis, 2014-2019, Italy kept neatly to the rules.
While government leaders, economists and the ECB were mainly concerned with keeping the Eurozone together, France continued to «overspend» relentlessly. Since 2008, the deficit has averaged almost 5 per cent of GDP, with the result that public debt now stands at 111 per cent of GDP. That is still some 30 percentage points away from Italy but also 50 percentage points above the 60 per cent from the Maastricht criteria. Would any of the current governments in France and Italy know where Maastricht is at all?
Party like it’s 2027!
The cause of the deficit is well known. Governments of most major economies simply cannot get their spending down anymore. Be it on healthcare, pensions, climate policy, and now defence spending, there is no turning back. Nevertheless, the finance minister is confident that by 2027, four years away, France will meet the 3 per cent standard. Do you believe it?
But interest charges are also weighing increasingly heavily on the budget. France paid more in interest only in the mid-1990s, when interest rates were long above 8 per cent. By comparison, as I write this column, France’s 10-year interest rate stands at a paltry 2.83 per cent. But then again, in the mid-1990s the national debt was exactly at that once dreaded 60 per cent ceiling.
Bankrupt
Although I would definitely call the growth model of most Western countries bankrupt, France is not going bankrupt just like that. At least not if the starting point is to keep the eurozone together. In that case, France is more likely to become a second Italy. A weak link in, manufacturing flawed, hanging together like loose sand. And as we have seen with Italy, the central bank of that diverse group of countries has to adjust its policy to the weakest link. It is therefore no surprise that, in its increasingly flexible (read: extreme) policy, the ECB has now created a support programme even before the next crisis.
The Transmission Protection Instrument (TPI) is a magic black box where the ECB no longer even has to explain why it is buying up bonds, in what proportion, and how the bank expects to sterilise these purchases. It has some vague criteria attached to it that you might reasonably expect Italy not to meet anyway. But such a vague magic box is also very useful for countries that are hot on Italy’s heels in terms of debt sustainability.
I conclude with a «conclusion» that I have to make very often. How is it possible to expect structurally higher interest rates in the long term?
Jeroen Blokland is founder and manager of the Blokland Smart Multi-Asset Fund and founder of True Insights, a platform providing independent multi-asset investment research. Blokland was previously head of multi-assets at Robeco. His chart of the week appears every Thursday on Investment Officer.