PARIS: France’s prolonged political crisis has turned the country into the eurozone’s fiscal flash-point, taking over a role long played by Italy.
The shift was thrown into sharp relief last Friday when France suffered its second sovereign downgrade in a week, just as Italy won its first upgrade from Fitch Ratings since 2021.
The gap between both of them is narrowing, according to that company’s assessment, which now puts the countries just three notches apart.
Short-term causes for concern about Paris are clear: prevailing instability since snap elections last year, missed deficit targets and no clear path to fiscal repair.
Parliament is splintered into irreconcilable factions and France is now on its fifth prime minister in less than two years.
In Italy, meanwhile, its current government led by premier Giorgia Meloni has been in office for almost three years, an uncommonly long stint, and has even succeeded in speeding up the pace of deficit reduction.
But for all the short-term developments in each country, longer-term factors are at play. In truth, the current troubles in Paris have been brewing for decades.
The global financial crisis set in motion nearly 20 years of divergence between France and Italy.
Rating companies responded to Italy’s high public debt and chronically low growth with a series of downgrades from 2011 onward. France lost its top credit scores around the same time, but didn’t fall as far and steadied from 2016 onwards.
Emmanuel Macron’s election in 2017 extended that period of solidity as ratings assessors and investors saluted his pro-growth, pro-business plans.
The bond market has told a similar story.
After the countries’ fortunes started to diverge in the global financial crisis, Italy was plunged into the centre of the euro’s debt turmoil alongside other southern European economies.
France, meanwhile, was able to cling to its status as a so-called core member of the currency zone, not far behind Germany.
Italy’s premier Silvio Berlusconi was forced to step down after a spike in borrowing costs.
It would take years for the country to get on a stable path and for the piecemeal fiscal efforts of various administrations to start paying off.
Throughout the period of Italy’s under-performance, spending in France was actually considerably higher.
It fell notably after Macron took office, but when Covid arrived both countries spent vast amounts. The French president echoed Italy’s Mario Draghi with a pledge to do “whatever it costs” to keep the economy from collapse.
As the dust settled after the pandemic and the inflation crisis that followed Russia’s invasion of Ukraine, France’s spending as a share of its economy was only slightly lower than when Macron took office – and still the highest level among the world’s advanced economies, according to statistics.
France has typically run larger deficits than Italy and rarely within the European Union’s limit of 3% of economic output, which the latter country is set to fall below as soon as next year. — Bloomberg
