The French are at it again. Not even a decade after the “yellow vest” protests paralyzed the nation, massive demonstrations have again roiled France. What began as a student movement ostensibly over the state of public schools has grown into broader anger over the cost of living. Hundreds of thousands have taken to the streets, and rioters have looted shops and even burned down the historic town hall in Limoges. The effects of the protests are likely to be far-reaching. With a highly contested presidential election scheduled for April, both the left and the right are trying to spin the unrest in their favor. The left is highlighting how the French state has failed so many people; the right is focusing on the disorder and destruction caused by the rioters. The world should be paying close attention. On several key issues, France is something of a bellwether for much of the rich world.
First, the widespread discontent shows the limits of high government spending. France is the pinnacle of tax-and-spend governance. Government spending is a massive 57.3 percent of GDP, more than half of the entire economy. Liberals in America often point to France as the paradigm to be emulated. Yet, despite the government largesse, people are unhappy. On education alone, the French government spends over five percent of GDP, which is about average for Europe, but high by global standards. Yet, massive protests are the result. Those advocating for big government need to be paying close attention. If citizens protest so violently in a country with as big a government as France, clearly throwing money at the problem is not an effective solution. People will always clamor for more.
Second, and bigger issue, is that for all of France’s problems, things are going to get worse before they get better. The finance ministry expects the budget deficit to be 5.4 percent of GDP this year, with debt reaching a record 119.3 percent. That would have been bad a decade ago; with interest rates rising, France will soon feel a serious pinch. Lenders have noticed. France now pays as much as 1.5 percentage points more than Germany to borrow, the widest gap since the euro crisis. That’s worrying enough, but lenders have become so skittish they are now willing to loan money to Southern European nations at a lower rate than to France. That is never a good sign.
There isn’t an easy way out. The government plans to tighten its belt and reduce the deficit to, wait for it, 5.0 percent next year. Even if such a modest cut passes, and that’s a big if, the deficit will remain unsustainable.
One might look at the United States, which has an even larger deficit and higher interest rates, and wonder whether France is really in such dire straits. The truth is that both countries need to get their financial houses in order. The US, however, has two possible off-ramps France does not have. The first is higher taxes. America has some of the lowest tax burdens in the developed world. Raising them significantly might be politically impossible, but economically it would be feasible and fairly simple. France, already heavily taxed, has no such option. Second, America’s economy is doing relatively well. According to The Economist, in the United States, borrowing costs are about two percentage points lower than nominal GDP growth. In France, borrowing costs are two percentage points higher than nominal GDP growth, the worst gap of any wealthy country. It will take a lot of luck, but with AI booming, the US might be able to grow itself out of a debt crisis. France’s stagnation over the last 15 years makes that all but impossible.
The worst-case scenario for France isn’t outright destruction; it’s that it becomes the next Greece. The parallels between Greece in 2006 and France in 2026 are becoming uncomfortably similar. Both ran significant deficits, had a high national debt, and faced increasing interest rates. In 2009 the Greek economy collapsed. The next decade was a total disaster. The nation needed three bailouts, totaling more than the size of its entire economy. The public sector was cut to the bone, with many government employees losing their jobs. Pensions were reduced repeatedly, with some individuals losing over a third of their monthly stipend. The retirement age was increased to 67. During the depths of the crisis, the unemployment rate hit nearly 28 percent. Real output fell by a quarter. These are Great Depression-like numbers. The Greeks are still poorer today than they were in 2006.
France isn’t at that stage yet. Its economy remains far more dynamic than Greece’s ever was. It’s still one of the world’s largest economies. The problem is that no one in French politics seems to recognize the danger. France’s size makes it a harder ship to sink, but also a harder ship to rescue. They have at least a few years to correct its course. Yet not a single political party is honest with voters about the pain it’s going to cause. Instead, everyone is playing hot potato, hoping for a miracle or, failing that, that they aren’t in power when things come to a head. It took a massive financial crisis for Greece to raise its ridiculously low retirement age to 67. Will France be able to make the same change before external forces compel it to?
Perhaps the most likely outcome is that France spends the next one to two decades stumbling along, staving off collapse with halfhearted reforms that never allow real growth but prevent a depression. France could spend years treading water, never setting itself up for sustained success, neither growing nor shrinking, slowly consigning itself to economic irrelevance. Yet another example of European stagnation and decay. There’s clear precedent for this.
In 1990, Italy was about ten percent richer than France. Over the next three and a half decades, unstable governance and ambivalent reforms kept the Italians out of serious trouble but resulted in an economy that’s only about eight percent larger per capita today than it was at the turn of the century. An entire generation of Italians has known only stagnation. Today Italy is slightly poorer than its neighbor to the northwest.
It would be a shame if the French economy suffered the indignity of becoming a second Italy. There’s still time to prevent that from happening.