00:00Karsten Brojewski is Global Head of Macro Research and also Chief Economist at ING Germany.
00:06Karsten, welcome back. Thank you so much for joining us.
00:09Just first of all, could I get your take on what your prediction is for Monday?
00:12Do you think that the Prime Minister is likely to lose this vote of confidence if it goes ahead?
00:17And if he loses it, what next?
00:20Yeah, the current base case is that he's going to lose it.
00:23Because don't forget, this is a vote, not a no-confidence vote, but he has a confidence vote,
00:28which means he needs really an absolute majority in Parliament, and this currently looks very unlikely.
00:34Well, next steps, then, you heard it in the report before, is indeed for President Macron to try to find a new Prime Minister.
00:42But probably this means, you know, same issues, same problems, only a few months later.
00:47And then the other alternative would be to have new elections.
00:51Why can't successive Prime Ministers get budget reforms through Parliament?
00:55Because there currently is no majority in France that agrees and supports reforms.
01:03There is no majority for pension reforms.
01:07There is no majority for austerity measures.
01:11There is no majority for cutting a government expenditure, which is close to 60, 60% of GDP.
01:19Because I think France, as in so many other Western European countries, thinks that the current situation can just simply continue.
01:28But why is France in such debt?
01:30Why are the public finances so unsustainable?
01:33Well, it's to some extent due to fiscal stimulus over the last couple of years.
01:41The French government was pretty quick in reacting to the pandemic with fiscal stimulus, also support in the energy crisis.
01:49And then we also had fiscal stimulus, fiscal support in order to boost growth, but also to attract investments to France.
01:58So these are factors which also led to the fact that the French economy has been doing, in terms of GDP growth, pretty well over the last couple of years.
02:07But at the same time, any government forgot that, you know, at the same time, debt is increasing.
02:15So they forgot that they also need to put on the brakes at some point in time and start austerity measures.
02:21And this is how we got to the current situation.
02:24Now, there has been some talk of Paris needing to go to the International Monetary Fund as the lender of last resort if reforms aren't enacted and borrowing is reduced.
02:33I mean, could it possibly come to that?
02:35That seems quite far-fetched.
02:36I mean, surely France still can access the public markets.
02:40Well, indeed, this is very far-fetched.
02:42We all learn, never rule out anything, but look at the current level of interest rates in France.
02:49So the French government pays some 3.6% on its debt.
02:55That is, of course, much more than in the past.
02:56But this is far away from interest rate levels that we had during the sovereign debt crisis.
03:03So a sovereign debt crisis is not at stake right now.
03:07What we're witnessing here is really currently a domestic political but then also economic crisis because being stuck in this political instability, being stuck in this kind of paralysis, not to do reforms, means that France will also stop being a growth engine for the European economy.
03:30And if France stutters, the German economy stutters, well, we all know what this means.
03:36No good news for the European economy.
03:39So they're not going to be heading to Washington to the IMF with their cap in hand anytime soon.
03:43But could there be a role to play for the European Central Bank and France's neighbors to intervene at all?
03:50You know, we have a playbook of how these things work.
03:53First of all, it's not really up to the French government, whoever sits in the government, to adhere to the European fiscal rules and to start some kind of austerity measures.
04:03If this is not happening, the European Central Bank and also the neighbors will not help.
04:10So this means help.
04:11And we know this from the euro crisis.
04:13So help will always come with conditions.
04:15If if we were to see some kind of financial market turmoil, then indeed the European Central Bank has instruments that it could use to to support France, to support and to buy French government bonds.
04:31But there will always be conditions attached to any kind of support, be it coming from the ECB or from from France's neighbors.
04:41Yeah. And we're not there yet.
04:42Carsten, thank you very much indeed for that.
04:44That's Carsten Brzezinski, Global Head of Macro Research and Chief Economist at ING Germany.
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