The sanitary crisis bill is not ceasing to get heavier. Growth numbers related to the 2020 4th quarter which will be published next week would register a less important rebound than previously expected. The prospect of new constraining measures until vaccination has put an end to the pandemic would still weight on growth in 2021. To cope with that situation, the French State has initiated a double action. It has instituted measures intended to enterprises whose activity has been hurt: guaranteed loans, taking into charge of employees part-time unemployment benefits. It has also launched a rebound plan to support growth once the obstacles caused by the pandemic will be reduced.
The budget deficit for the 2020 year initially forecast at 93 billion has risen until 178 billion. That rise results with a near equal share from expenses increases and receipts reductions. Among these ones, income taxes only has brought almost as forecasted. That mainly results from the recovering method. The tax is paid every month and based on previous year revenues. So it is not possible to exclude that adjustments will occur in 2021 to compensate what has been over received in 2020, especially to the benefit to these who have had, due to the pandemic, a reduction of their remunerations.
The government has affirmed as soon as at the beginning of the sanitary crisis that it will do what was necessary to soften the economic consequences. It is the famous doctrine of “whatever it costs” which reminds us the words used by Marion Draghi, then chairman of the European Central Bank”, in July 2012 when he launched the plan to save euro. Actually, and as a total rupture with the political commitments taken a few years before to reduce public deficits, as with European rules, the government did not hesitate to adopt costly measures in order to cope with the sanitary crisis. But even before this one was finished and we return to a “normal situation”, a tough debate has been started about the financial risks generated by the State brutal indebtedness increase and its redemption.
That debate had first an ideological dimension. For a whole thinking school, by definition, the State intervention on economic issues cannot be else than harmful. So, it must be put an end to it and, in order to convince, there is no better argument than fear. Then they play on confusion. Redemption constraints which weight on a person or on an enterprise are heavy and the sanction is well known: bankruptcy. But regarding States, it is quite different, especially for developed countries. They can afford very variable indebtedness levels without affecting investors trust. Japan has today a twice higher public indebtedness ratio than the one which is forecasted for France in 2021, without it hurts its financing ability. But for that, it is necessary to be the least dependent from foreign countries, which is guaranteed when the balance of payments is equilibrated and when the saving level of nationals is high enough or again when the country currency has a large share of international transactions, as it is the case with the dollar. For decades, United States had a double deficit, a public finance one and a foreign trade one without that hurts the country to finance them.
The debate has also a technical dimension. In front of the strong rise of financing needs, we ask us how markets are going to react. Until now, regarding France, the answer has even exceeded all expectations. During year 2020, the State has not met any difficulty to issue a huge amount of bonds corresponding to the redemption of past ones, to the initially forecasted deficit and to the new expenditures generated by the crisis. And this month, trust has not been shaken by a sanitary situation much more worrying with the apparition of new forms of the virus. After seven adjudications, having maturities from 2 to 32 years, the State has risen 25 billion to which must be added for the same amount Treasury bonds and 7 billion coming from the issuance of a new 50 years bond, carrying a 0.6% interest rate. The demand, for this bond, has even beaten a record with more than 75 billion.
The issuance program, forecast for 2021 will correspond to 11% of the GDP, as last year. During the previous years, the ratio was 8% of the GDP. So, on a technical point of view, this policy of public deficits increase does not find obstacle. So, are we frequently hearing, that is going to have a cost which will weight on future years. But it is wrong because these bonds carry fixed rates and have more and more long maturities. Despite the high increase of public indebtedness, the debt yearly charge does not stop to reduce due to the interest rates fall. The State has not anymore to pay the very high rates of past bonds issued in the Nineties because it has reimbursed them.
In 2020 the interest rates charge was 37 billion. It will decrease to 33 billion in 2021, amounts to which must be added the cost of the indexation of the loans coming at maturity. Atop of that, the European Central Bank, due to its accommodative policy aimed at supporting activity and to allow inflation to recover its target “inferior but near 2%”. But for every country, the bonds are transferred to the central banks of issuing country which restitute to the State they belong to the eventual perceived interests.
So there are no reasons to worry or even less to launch the idea of a moratorium or even of cancellation as are doing these who are looking for arguments to provoke the disengagement of the State. But all that is possible only because euro exists. Without its creation, the ECB wouldn’t exist. Without it, every country would be judged on its ability to reimburse when it the large current accounts surplus of the zone as a whole which offers a strong guarantee and which explains the maintenance of these so low rates on so long maturities. It is also the existence of the euro which favors the convergence of the rates between countries. For three, since the indebtedness gap between States-members has increased, the spreads between them have been reduced. Between France and Germany, since the beginning of the year, it is for the 10-years bonds around 30 basis points, i.e. twice less than during the previous years. The common currency has not only allowed France to hugely support its economy. It has also allowed it to doing it with exceptionally favorable conditions.
In fifteen months from now in France the presidential election will occur. In 2017, several candidates have proposed as a key point of their programs the return of national sovereignty and the abandon of the euro. The low credibility of that proposal had played a determining role in the result of the second round. Let’s hope that this time reason will prevail and that, especially the left will not risk to follow that way and that we will at last admit that, in this domain as in many others, Europe and the euro are determining factors of our financial strength and our ability to surmount crisis.