The French government hoped to steer the country's economy into calmer waters. After the forecast for this year's budget deficit surprisingly rose from five to more than six percent of GDP, Prime Minister Michel Barnier presented in October a plan to bring the budget deficit down to the EU-allowed percentage level by 2029.
Unstable political situation
Politically, however, the country is in an extremely unstable state. At the same time, the French economy is performing well at the moment and is expected to grow by 1.1% this year. The unemployment rate in France is 7.4% - which is a good value against the background of the results of previous years. Inflation is at around 2%, and two years ago it was still over 5%.
According to Denis Ferrand, head of the Rexecode Institute for Economic Research in Paris, these relatively good data still cannot hide the fundamental weakness of the French economy. “From 2019 since then, French and European companies have lost a lot of their competitiveness vis-a-vis China," he told DV. “In Europe, production costs have increased by an average of 25%, and in China - by only 3%”. In Germany, this is primarily the result of temporarily high inflation, interest rates and energy prices - especially after the start of the Russian invasion of Ukraine in February 2022.
Structural crisis
Two independent studies – of Rexecode and the British consulting firm Ernest & Young – show the reticence of businesses regarding investments: 45% of French companies have decided to postpone them for better times, and 18% even consider not investing at all. This is an important indicator, as France is the European country that has attracted the most international investment since 2019. this way, the data of Ernest & Young.
Lawyer Philippe Drouin of the Paris firm Hogan Lovells, which is a liquidator of companies in bankruptcy, confirms that investors are cautious. “It is currently very difficult to find buyers for companies in bankruptcy proceedings. I am currently working on over 60 such cases, which is a lot. "The number of bankruptcies is approaching that of the time of the international financial crisis in 2008," he told DV. According to estimates, around 65,000 companies are expected to declare bankruptcy this year. For comparison: last year they were around 56,000.
Companies now have to repay loans granted during the coronavirus pandemic. According to the expert, it is a structural crisis that affects different spheres - for example, the automotive sector due to the transition to electromobility, as well as the real estate sector, where offices are less in demand due to home office work. In addition, high interest rates in the capital market make it difficult to finance investments, making them less attractive.
„Fundamental error“
Anne-Sophie Alsif, chief economist at Paris-based consultancy BDO, however, believes the economic situation is not so dramatic. “Our macro indicators are improving, but without a budget for 2025, we could slide into an economic crisis, which would be a real disaster. This will be a signal to investors that France is unable to implement a plan to reduce its debt, she told DV. However, Alsif criticized the political development: “Our political situation is extremely unstable. Macron's decision to dissolve the parliament was a fundamental mistake, she is emphatic.
„It is an exaggeration to believe that France is facing a financial crisis,”, Christopher Dembick, an investment advisor at the Paris branch of the Swiss asset management company Pictet Asset Management, told DV. “Because such a thing would mean claiming that France is no longer able to service its national debt - just like Greece since 2009. But such a trend is not noticeable so far, he commented.
Too big to fail?
The interest rate on ten-year French government bonds is currently around 3%. Recently, however, they exceeded those of Greece for the first time. Therefore, the economist Ferran is not at all convinced that the country will not fall into a financial crisis. “Until now, France has always relied on being “too big to fail”, i.e. too big for the rest of Europe to let it fail. But Brussels is already starting to lose patience with France's inability to reduce its debt, he claimed. This debt is currently greater than France's gross domestic product.