The head of the International Monetary Fund sent a blunt message to the French government in an interview with CNBC on Wednesday: It needs to get its finances under control.
France is currently in a new political crisis, with violent student protests entering their third week.
The movement comes as young people across the country complain of long school days, teacher shortages and dilapidated schools, while the French government tries to persuade a politically divided parliament to agree to spending cuts worth tens of billions of euros.
Political instability in France is putting pressure on the country’s national debt, known as OAT. Investors are now seeking higher yields than the French 10-year bonds issued by the Italian government. bond yield It has risen more than 100 basis points since the beginning of the year.
“What we are seeing in France is, on the one hand, the complexity of the consequences of shock after shock of debt, climbing a stairway to heaven, and, on the other hand, the political dynamic in France that creates further difficulties for the Treasury to chart a clear path to tightening,” IMF Managing Director Kristalina Georgieva told CNBC’s Lisa Kim on the sidelines of an event in Singapore.
He noted that there is “a very clear recognition in France that we need to keep the budget deficit below 5%”.
France is subject to the EU’s excessive deficit procedure, which recommends bringing the national deficit closer to the 3% threshold. Last year, France’s deficit reached 5.1% of GDP.
But when asked whether the current situation in the French bond market reflected the eurozone debt crisis of the early 2000s, Georgieva suggested Europe was now better protected.
“The French economy is growing,” she said. “And I think we have to remember that Europe has a much more mature system (compared to last time). We have the strength of the European Central Bank. We also have other instruments that Europe has developed to protect against financial stability risks.”
But she added: “Again, my message is to keep your house in order.”
Asked whether the French government’s proposed multibillion-euro fiscal adjustment would become even more difficult in the wake of the student protests, Georgieva admitted: “There is no doubt that it will be difficult.”
He noted that since the coronavirus pandemic, the public has become accustomed to governments “rushing to the rescue” of people and businesses during shocks.
“It’s difficult, but it takes active communication to explain to people why it’s actually in their interests to get to a better situation. I think we need more voices talking about that, not only from government but also from trade unions and business, to unite people in the mission of improving the prospects for a better economic future,” she said.
“The bond market is reacting to fundamentals, and fundamentals are changing,” he added. “Inflation is rising, interest rates are rising, and government debt is high. Bond markets are looking for signals that government borrowing will be reined in, and we encourage governments to send a signal because if they don’t, we may see further debt growth.”
