Veron: 'Distinguishing the real French political crisis from the lack of a immediate financial one'

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00:00Now, let's take a listen to what the Prime Minister had to tell his colleagues earlier.

00:07As captain of the ship, aware of the lake, that is constantly widening as water floors are holds,

00:15I say that our duty is first and foremost to immediately set about plugging it and to do so together.

00:23If we want to save the ship that we are on, that our children are on, we must act without delay.

00:30Submission to death is no different than submission by military force.

00:39Joining me now from Washington, D.C. is Nicolas Véron, a senior fellow at Bruegel

00:44and also at the Peterson Institute for International Economics.

00:48Nicolas, thank you so much for your time.

00:50Given this ongoing political chaos, what exactly is the real state of the French economy?

00:57It's not that bad.

00:58We have a French economy that is pretty diversified, is not in a great shape, but not in a particularly bad shape.

01:06It's less affected by the trade war, the Trump tariffs than, for example, Germany or Italy.

01:13But indeed, the Prime Minister is right.

01:15France has a bad fiscal situation, has not gotten its government finances in order.

01:22That's not a new issue.

01:23It's not really reaching a point of crisis.

01:26It has been there for decades, actually, that France has been fiscally incontinent.

01:32The Prime Minister is right to dramatize the issue because it has to be tackled at some point.

01:37But I think it's important to distinguish between the political crisis, which is real, as was mentioned by your commentary,

01:44and the absence of an immediate financial crisis for France or for the Eurozone.

01:50And I certainly am not among those who fear a financial crisis in the very short term.

01:55So what needs to be understood is this distinction between a political crisis,

02:01an unsustainable fiscal situation, which will need addressing at some point,

02:05but also the fact that it would be exaggerated to say we have a financial instability right now.

02:12Having said all of that, let's talk about the logistics.

02:15The reality is he's not likely to get that confidence vote later today.

02:20And as a result, it freezes Parliament.

02:22So where does this leave the handing down of the national budget, which normally takes place in October?

02:29You mentioned, or your colleague mentioned, the Socialist Party, and they really hold the keys of the current situation.

02:36They can negotiate some things that gives them a better position in government than they have had so far.

02:42But at the same time, they need the votes of the Republicans, the traditional central right,

02:47and therefore they cannot push it too far.

02:49So we'll have a little bit of an adjustment.

02:51There was already an adjustment between, remember, the previous Prime Minister, Michel Barnier,

02:56who was much to the right of Bayrou, and this one with Bayrou.

03:01There will probably be an adjustment going further leftwards,

03:04but not to the point that would break the willingness of the Republicans to, if not support,

03:12at least not vote against the new government.

03:14So at this point, I think it's plausible that there could be a new parliamentary equation

03:20that would support a new government with a new Prime Minister, a bit to the left of Bayrou,

03:25that government may be able to pass a budget.

03:27This is what the negotiation is primarily about.

03:30Will it last until the next general election planned in spring 2027?

03:36At this point, it's too early to say.

03:38But you do appear to be rather optimistic in your assessment of the economic situation.

03:43So I take it you would see that France would not need a bailout from the IMF?

03:51Well, the mention of a bailout by the IMF was unfortunate.

03:55In any case, if France needs a bailout, it will not come from the IMF.

03:58It will come from the European Stability Mechanism, the ESM,

04:01which was put in place during the Eurozone crisis and is still there.

04:05And indeed, I don't think we're anywhere close to a situation

04:10where France would lose access to the financial markets for funding government expenses

04:15and therefore need a bailout or even extra liquidity from the European Central Bank.

04:21When you look at market movements during this financial crisis,

04:24actually, they have been quite sanguine.

04:26So what I'm suggesting is not particularly at odds with market perceptions.

04:31Of course, you can paint a scenario in which we would face an intractable political crisis,

04:35which would suddenly escalate the situation.

04:37I don't think that's very likely at this point.

04:39But with France failing to rein in its debt below 5%, the required 3%,

04:45how is Brussels going to respond in the weeks and months to come?

04:51Well, whether we like or hate that situation,

04:54what we have learned over the last 25 years

04:56is that what really disciplines at least larger European member states like French,

05:01which it may be a bit different for the smaller ones,

05:05is not the kind of administrative discipline from Brussels and the fiscal rules and so on and so forth.

05:11Essentially, France has happily ignored those rules and those assessments for 25 years.

05:17I think that's bad.

05:18I think it's bad policy, but that's what France has done

05:21and hasn't suffered any bad consequences for that.

05:24So that can continue.

05:25What matters is the market discipline.

05:28There's an increase in spreads in yields, in cost of borrowing for the French government.

05:34And at this point, you don't see the market panicking about that.

05:38And actually, there is a little bit of a situation which is frustrating for people

05:41who want to see, with good reason, France correct force in terms of fiscal sustainability,

05:46is that you have a lot of money going from the United States to Europe,

05:50long story short, because of the policies of the Trump administration.

05:53And that, all things equal, makes it easier for the French government to finance itself.

05:57So in technical language, that's called spread compression.

06:00And therefore, the market signals to the French government

06:04are not maybe what Prime Minister Bayrou is implying they should be,

06:10precisely because it's a moment where Eurozone member states in general,

06:14and France among them, find it relatively easy to find funding,

06:17given this kind of macro, geo-economic situation.

06:22But you were talking there about market perceptions.

06:25So obviously, all eyes are going to be on what happens with a slew of key sovereign debt

06:30ratings review expected in the coming weeks.

06:32To begin with, you know, this Friday, Fitch will be reviewing its AA minus rating

06:37with an expected negative outlook.

06:40Surely, all of this does not sit at all well with either of the markets,

06:44yet alone with the French president, Emmanuel Macron.

06:47Oh, I think the markets are anticipating a downgrade of French debt.

06:52So if there is a downgrade, it will not affect markets very much.

06:55And in any case, for a country like France, on which there is a lot of liquidity in the market,

07:00actually, the rating agencies are following the market,

07:03or tend to be following the market drivers and lead the market.

07:07So I wouldn't over-dramatise the ratings action.

07:10They're important.

07:11They're an important barometer.

07:13The markets look at that, but they also look at the fundamentals,

07:16and they know where they are right now.

07:18I want to also talk about the French public themselves.

07:22It's been reported that at least 19% of French people are now saving like never before,

07:28driven by the ongoing political instability.

07:30And as a result, growth is starting to contract quite noticeably.

07:36Yet another sign of how political chaos impacts all of us in this country, isn't it?

07:42I'm not going to dispute your numbers,

07:45but I think the main point is the one that Bayrou has made in the snippet that you broadcast.

07:51This is bad long term.

07:53This is basically stealing from the younger generations to the profit of the baby boomers,

07:58as he controversially put it.

08:00And I'm a late boomer, so I'm part of the problem.

08:03So I think this is true.

08:06He's right.

08:06His analysis is correct.

08:08And by the way, his budget proposals were reasonable.

08:11So we have a problem of collective public responsibility in France

08:15and also of public perceptions,

08:16because we have this paradox, which Bayrou has tried to address,

08:20that the younger generation actually are not really acting for their own benefit,

08:25because it would be in their benefit to correct course now in terms of the fiscal situation.

08:31But that's the French politics.

08:33Again, I think they are hitting boiling points in terms of political crisis

08:37and political instability.

08:39They're not hitting boiling points in terms of a financial kind of instability,

08:43as we have seen for other countries during the Eurozone crisis.

08:46And, of course, you know, as you say, there are two different approaches to this,

08:52the markets and social unrest or the, you know, political instability.

08:57You have the Block On 2 movement calling for people to bring the country to a standstill,

09:02rather, on September 10th,

09:03not to mention a series of nationwide strikes on September 18th.

09:07How will all of this feed into the country's economic standing?

09:12It will be very interesting to see whether this Let's Block Everything movement on Wednesday

09:19achieves a lot of success or limited success or no success at all.

09:24I think at this point nobody knows,

09:25because this is a leaderless, unprecedented movement,

09:28and people rightly draw a line between the Yellow Vest movement of 2018, 2019,

09:34and this new movement.

09:35But it's not exactly the same thing either.

09:37So we will see.

09:38So, I mean, all this action and the political crisis itself doesn't make France look good

09:43in the eyes of the world.

09:45This is a bit, you know, embarrassing and humiliating for a nation that is so proud,

09:50sometimes to the point of arrogance.

09:52But I think this is, again, a matter of communication and reputation,

09:57not a matter of financial stability,

09:59because investors tend to look through these headline effects.

10:03And as to the social cohesion and what you mentioned about, you know, perceptions of austerity,

10:10the truth is that France hasn't experienced any true austerity in the last 20 years.

10:15There has not been much fiscal tightening.

10:17There has been a lot of fiscal laxity, actually, when you look at it in comparison,

10:22with countries which have experienced genuine austerity.

10:25So there is a bit of a general misperception to a certain extent in the French public

10:31that they're having it less good than they actually are having it.

10:34And I don't want to sound callous or casual, because many people, of course, are suffering in France.

10:39But if you look at the government spending and public services,

10:43there have been very generous public expenditures for the French public.

10:47And you see that in any kind of fact-based analysis.

10:50So I think there is no contradiction in saying that there is a need to correct course

10:55in terms of the fiscal trajectory of the French Republic,

10:58and at the same time, the fact that it's possible to maintain a high quality of public services

11:03as currently exists in the country.

11:06Nicolas, just a final question, and briefly,

11:09if you had the opportunity to address the Assemblée Nationale today,

11:13in your opinion, what immediate steps does France need to take in order to cut its massive public debt?

11:23Well, you know, I'm not a politician, so it's not really a question I can answer.

11:27I believe the budget proposal that Bayrou had presented was, by and large,

11:33quite reasonable and balanced.

11:35Obviously, it will not be adopted as such, and there will need to be some adjustments.

11:39I think those adjustments should be made, as Bayrou suggested,

11:44but with somebody else in charge, of course, with the long term in mind.

11:49That means that we should not just look at how to plug the gap this year,

11:53because in a way, it's not the most important thing.

11:55We should make sure that, you know, there is a potential for growth and productivity in France.

12:01We can have successful entrepreneurs, successful high-growth firms in the country,

12:05as is currently the case, and we could have even more of them.

12:10And ultimately, that's what drives growth.

12:12That doesn't mean that public services have to be sacrificed to the interest of business,

12:17but at the same time, we need a high-growth potential if we want to be able to repay the debt,

12:22ultimately, or to keep a sustainable fiscal trajectory, to be more accurate in my wording.

12:29Nicola Verón, it's been a pleasure speaking to you.

12:31Thank you so much.

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