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Economic growth in France, the eurozone’s second largest economy, has stagnated since 2012. Our Risks and Vulnerabilities Country Briefing highlights that one of the biggest threats to the country’s macroeconomic stability is the public debt, which the IMF forecasts will hit record levels in 2014 of 95.8% of GDP. The government has committed to reducing its general government budget deficit to below 3.0% of GDP by 2015 (the EU-wide limit) from 4.3% in 2013.
Many analysts blame the increase in public debt on tax rises such as the VAT increase in 2014 and the effective 75.0% tax on salaries above €1 million (to be paid by companies after conditions were revised), arguing that these have resulted in even more subdued economic growth by weighing down on consumer and business confidence. Others blame the country’s high levels of social welfare spending. Government expenditure on social security and welfare in France accounted for 44.2% of government spending in 2013, amongst the highest in the OECD. Furthermore, the government faces repeated difficulty in carrying out reform or savings cuts because of social discontent and frequent strike action. Yet France is at risk of being the next victim of the eurozone sovereign debt crisis if the public debt continues to escalate, which will harm investor confidence and further damage economic growth prospects.
Source: Euromonitor International from national statistics/Eurostat/International Monetary Fund (IMF), World Economic Outlook (WEO)/OECD/UN
The level of public debt in France is significant, not just for the country’s own macroeconomic stability, but for the entire eurozone should there be a resumption of concerns about unsustainable sovereign debt. This could have spill over effects across the economic bloc, especially as France is the eurozone’s second largest economy. There is currently a debate about how public debt is calculated as France thinks it should not include financial support made to struggling eurozone countries or the ailing banking sector. The IMF forecasts that French public debt will decline to 87.6% of GDP by 2019. Further economic stagnation and persistent high unemployment are risk factors for government debt overall as they contribute to below potential taxation levels. The government needs to push through necessary but unpopular economic reforms in order to kick-start economic growth which will help to bring down the debt burden and subsequently restore confidence in the French economy. Dissatisfaction with the government was made clear by the unprecedented win of the National Front far right party in the European Parliament elections in May 2014.