could this happen in france?

British Prime Minister Liz Truss and her Finance Minister Kwasi Kwarteng panicked the financial markets with the announcement of energy support measures and massive tax cuts with unclear funding. This economic plan prompted an intervention by the Bank of England on Wednesday to stabilize the situation. Could such a crisis happen in France? Economy Minister Bruno Le Maire would be reassuring on Friday. In France, “We keep interest rates that remain reasonable” and “pretty close to German prices”because “there is consistency in France’s economic and financial policy”assured Bruno Le Maire, on the contrary “some disagreements”. Here’s what we know.

What Liz Truss did

The new British Prime Minister, Liz Truss, announced on Friday a mini-budget that includes help for households in the face of soaring energy prices and overall tax cuts, in favor of the richest, all financed by debt. In particular, the leader plans to remove the 45% bracket in the income tax scale (which applies to those earning more than €170,000). A plan that has not gone down well with the markets, who see it as not credible and at odds with the Bank of England’s policy of raising interest rates to reduce inflation.

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Furthermore, the funding and impact of the Truss plan remains vague and unquantified by the government. It has been estimated by economists at an amount of 100 to 200 billion pounds (between 113 and 226 billion euros). A colossal number. As a result, the interest rates at which the British government borrows have skyrocketed. This led to central bank intervention in the markets to calm the storm and recover “financial stability”.

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Could it happen in France?

Like Britain, France is in the middle of a budget presentation period. In particular, the government announced the maintenance of the tariff shield for 2023 at a cost of 16 billion euros for the state (minus the mandatory taxes on producers of renewable energy, which must repay to the state part of the profits associated with the price explosion). The government deficit is expected to be 5% in 2023 against 9% for the UK, according to Barclays bank. Could a persistently high government deficit and a debt now exceeding 110% of GDP work against France?

Also read – Britain: how Liz Truss caused a financial storm in 6 acts

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Head of market analysis for the broker IG France, Alexandre Baradez recalls an iron rule in the financial markets: “The markets can decide at any time to attack a country’s public debt because of a certain event. That’s what happened with the Greek or Italian debt crisis. The markets do what they want. »

But unlike Britain, France has “two firewalls”. First, belonging to an economic zone, including the protection of the European Central Bank: “There are few candidates to bet against the ECB”, summarizes Alexandre Baradez. In July, the ECB also announced a new tool to protect the most fragile states from speculative attacks on their debt. “It is a well-thought-out, very flexible instrument for buying back the debt from countries that need it. »

Marc Touati*, economist and president of the ACDEFI firm, is much more pessimistic. “ What happened in England will happen here. » Even if he acknowledges that the ECB continues to protect us, he believes that France is in the same vicious circle as the UK, which he sums up this way : “If the public debt rises, you are less trustworthy, interest rates rise, this breaks growth, it causes recession, which makes the debt rise again. »

He notes that the markets are used to “The French are making budgetary slippage”but does not encourage “declare victory too soon”and notes that we used “all our cartridges during the coronavirus pandemic. We are at the peak of public spending, taxes, debt, we no longer have room to maneuver”. he believes. “ The yield on French debt is currently at 2.8%, it was -0.4% in 2021. We haven’t seen a bond crash like this since 1986.” According to Bercy’s forecasts, the debt burden should thus reach 60 billion euros in 2027, almost three times the 2020 level.

Could the British debt crisis have quick consequences for the French economy?

Alexandre Baradez wants to be reassuring: “It is a British crisis. “INHe believes that the US has no interest in abandoning the UK from a strategic, economic and geopolitical point of view, although there have been post-Brexit tensions.

However, Marc Touati notes that Britain is one of the few countries where France has a trade surplus. However, the current crisis has caused the pound to fall against the euro. A situation that does not help French exporters, who are less favored by a strong currency. According to him, however, this crisis will have only one “small economic impact”.

However, Marc Touati solemnly warns of a possible European debt crisis in the medium term: “With the still sky-high public debt in the countries of the South and in France, but also with the Italian and perhaps soon French political crisis, the situation will of course not improve. And all the more so as a global crisis of confidence is also taking hold regarding the functioning and sustainability of the Monetary Economic Union and its less and less credible ECB. »

*He is the author of the book Reset II, Welcome to the next world (Editions Bookelis)

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