France can no longer afford to wait. The very recent and sharp increase in the risk premium on French government debt is a major warning sign. International investors are becoming increasingly concerned about the trajectory of France’s public finances. The danger is a self-reinforcing spiral: higher interest rates increase the cost of government borrowing, drive up debt-servicing costs and widen the deficit, which in turn fuels investor mistrust. Restoring confidence urgently requires a firm commitment to credible structural reforms that demonstrate our determination to end denial and put the public finances back on a sustainable footing without stifling growth.
Three priorities stand out.
Reform the pension system. Demographic ageing makes it necessary to adjust the length of working lives. In a pay-as-you-go pension system, the rising number of retirees relative to the working population cannot be sustainably offset by higher contributions or lower pensions.
Decoupling pension increases from inflation can contribute to an immediate adjustment. But it is merely a stopgap, made necessary by our inability to reform. If maintained over time, it would squeeze pensioners’ living standards and undermine the confidence of both retirees and working people in the pay-as-you-go system. Above all, it must not become another pretext for postponing the essential reform yet again.
France cannot indefinitely remain an exception to the changes already under way in so many other European countries, as the progressive American economist Paul Krugman has just reminded us. In his view, a failure to control the debt, combined with France’s refusal to acknowledge the need to raise the retirement age, could trigger a major financial crisis and undermine the European project.
Increase youth employment and boost productivity. Encouraging employment at every age, improving workforce training, decisively raising educational standards and strengthening business competitiveness are essential to increasing our potential growth and sustainably financing our social model.
Bring public spending under control and make it more effective. The aim is not to indiscriminately cut public services, but to reassess ineffective programmes, duplication and spending whose outcomes do not justify its cost. A credible, quantified multi-year plan must gradually stabilise the public finances without sacrificing worthwhile investment or social cohesion.
We must break out of the relentless race between public spending and compulsory levies that has brought us to unsustainable levels that can no longer—and must no longer—be increased. This has weakened our competitiveness and incentives to work, while setting us on an uncontrolled debt trajectory. Fiscal responsibility and control of the debt ratio are not enemies of social protection. Quite the contrary.
France can still, at the eleventh hour, avert a crisis by choosing to put its public finances back on track. But that room for manoeuvre is rapidly shrinking as financial mistrust takes hold. A coherent and ambitious reform programme that finally puts an end to denial could restore confidence and quickly bring down our worrying risk premium. It could also persuade investors to give France the time it needs to change course.
Politically impossible? The National Assembly must recognise the immense stakes. France is too big to be abandoned, but also too big to be rescued without divisions within Europe and without stringent conditions. It must therefore get itself out of the very serious predicament into which it has allowed itself to drift.
It is urgent to act responsibly to avert the looming crisis, whose inevitable outcome would be a bitter austerity cure, with effects that would be long-lasting and painful. European cohesion would also be put at risk. Will we know how to avoid such an outcome?
