The publications of indicators showing an improvement of French public accounts and a stabilization of its debt, has been immediately followed by alarming comments on its still excessive level and on the risks it weighs on the country.
First, this rhetoric has no influence on international investors. Since the beginning of the year, The Treasury has issued short term paper carrying negative interest rates, close to –0.5% recently. So, subscribers have agreed to pay an interest to the State to acquire its securities. Switzerland, Japan and Germany are in the same situation. The result is also favorable when France wants to issue medium and long term bonds: the average rate since the beginning of the year is 0.42%.
The State will pay all along the duration of the bond interests 5 to 10 times lower than what it was paying in the past, even if Agence France Trésor practice of issuing bonds at rates which are much higher than market rates, and cashing an issuance premium, will slow this trend. This practice, which has culminated in 2015, with a record of 17 billions cashed, is receding with only 3 billions collected during the first quarter. In despite of that, debt cost in 2015, 42,1 billions was 2,3 billions under the initial estimation in the 2015 Law. The Program, for the years 2015 until 2017, adopted in 2014, was forecasting for the year 2016 a 47,7 billions charge and for 2017 more than 50 billions, based on a rebound of inflation and of interest rates. We will be very far from that. The budget for 2016 has inscribed a charge for the cost of the debt as low as 41 billions.
The fall of the cost of the public debt has significantly contributed to the reduction of the deficit at 3.5% of GDP, and the government is proud of that. It results from both ECB policy and, last but not least, from investor confidence in France financial strength and solvency. We frequently hear liberal economists, as notably our last Nobel Prize, Jean Tirole, saying that this situation is precarious and that “if markets start to doubt about France strength, interest rates will go up very quickly and cost of the debt will become very heavy”. But it is wrong. Short term debt only will be affected and it represents less than 10% of the debt. The remaining share of the debt, which average duration is above seven years, and which has been issued with a fixed rate, will be just slowly affected, with the same rhythm than its amortization and its replacement by new bonds.
Regarding the hypothesis of a supposed worry of financial markets, it is only held up to justify the adoption of unpopular decisions, which are not without consequences on growth and, at the end, on the restoration of the French public finances. The true indicator of the ability to a country to pay its debts, is the wealth of its nationals. The reviews made each year by the French statistical body, INSEE, are confirming that France is one if not the richest country in Europe. The French own assets worth of more than 10 000 billions, the equivalent of the 5 years of GDP, with a substantial increase during the last 15 years. Their financial assets, were evaluated by Bank of France, at 4 377 billions at the end of 2015 3rd quarter, equal to twice the amount of public debt following Maastricht criteria. Life insurance contracts alone represented 1650 billions. This wealth has increased by 100 billions each year during the last four years, due to an increasing financial saving rate. Facing uncertainty, French people are building up capital. It is one of the reasons of growth weakness. And as tax receipts are based on consumption and revenues, the State doesn’t make any profit from the private wealth increase and has difficulties to reduce its deficits.
To talk about the “French tragedy” as does the philosopher Marcel Gauchet, is, in these circumstances, indecent. Every year, French people save more than the state needs to finance its budget deficit. A growing share of the public debt is indeed subscribed by foreign investors. Some are interpreting this as a sign of vulnerability. This is a second mistake. Due to quotation techniques, most of the life insurance funds which are the main subscribers of French State bonds, are listed in Luxembourg or in other Europeans countries. But the real owners of these assets are French.
The origin of these controversies lies in the choice of the Maastricht treaty criteria, which had been set at the beginning of the Eighties. The 3% ratio appears for the first time at a press conference given by François Mitterrand, on June 9th 1982. Europe, and first of all, France, are emerging from a decade, the Seventies, characterized by inflation. But these ratios are easier to fulfill if inflation is high. It is obvious for public debt since it is not index-linked when GDP growth includes price rise. It is the same for public deficits since fiscal receipts, due to their bases are profiting more from inflation than expenditures. French records until 1980 appear today as examples but for bad reasons: the State was the principal recipient of inflation and the savers the victims. At that time, inflation was a hidden wealth tax paid by everybody. The only exception was this extraordinary 7% 1973 bond, indexed on gold issued just before the U.S. decide that its price was liberalized. The State will pay it back at a price representing seven times its facial value. It has cost to the public finances 50 billions FF.
Today, the situation has reversed. These criteria penalize the States in the same artificial way they did when they favored them. They were supposed to avert against the inflation risk. But the main risk today is not anymore inflation but the bankruptcy of a State. And the others don’t want to pay for its mistakes. Irish and Spanish crisis have scarred virtuous countries and it is understandable. But the paradox is that these two countries respected the two famous criteria, and were even above the ratios,. So, it is urgent Europe adapts its rules to new realities. A good sense rule must be accepted for public deficits: when the household financial saving rate is above the public sector deficit, Brussels has no right to interfere in the debate. This is a national choice between to tax and to borrow since needed resource can be subscribed by nationals. Regarding public debt, it must be compared not with the annual production but with the financial wealth of the nationals of the concerned State. These new criteria will introduce more flexibility in economic policies and will give more rooms to countries, like France, characterized by an excessive building up of capital, which is harmful to growth and employment.
The plea in favor of “structural reforms” has invaded the public scene, in France as in Europe. But the first of these reforms should be the reform of these obsolete criteria which are liable for the failures of the policies designed to respect them. With these new criteria, France would appear as one of the best pupils of the euro zone. It is the reason why, with all due respect to the pessimists, our debt is not scaring foreign investors and we benefit from such low interest rates.