The downgrading of France’s public debt rating from AA to AA- by the rating agency Fitch sparked a number of political comments, which largely missed the point. The left believed to see in this lowering the proof that, decidedly, the reform of the retirements had been used for nothing. Those who have repeated this argument have not read or understood Fitch’s recitals. What is said by the rating agency is not that the pension reform is unjustified or ineffective, but that France does not know how to reform in an atmosphere that is not hysterical.
Fitch adds that our deleterious social climate can discourage governments from carrying out structural reforms, or even lead some to cancel them. The agency therefore does not criticize the pension reform in itself but fears, at best, that it will be the last courageous reform of the five-year term, at worst that it will be called into question in four years by the left or, more likely hypothesis , by Marine Le Pen. The problem is that the state of our public finances is degraded. The ratio of our public debt to GDP reached 112% at the end of 2022, the highest figure of all the AA-rated countries, countries whose median debt is… 48.4% of GDP. Given our deficits, in 2027, the ratio for France will still be 17 points higher than its pre-pandemic level. Fitch’s degradation was therefore explicable.
The real issue is to understand why, despite a deteriorated public finance situation, structurally weak economic growth, an inability to reform its public apparatus, why our rating remains so high and the interest rates at which we are in debt as low. Already below 3% in ten years, they have even declined since Fitch’s announcement. France, which has a stubborn primary deficit (excluding interest charges), is borrowing at a lower rate than Italy, which has been running a primary surplus for years. What is this miracle?
Bercy, a formidably effective ministry
First reason: Bercy has known how to raise taxes for a long time, and even more so since the introduction of withholding tax for income tax. Institutional investors – banks, insurance companies, or pension funds – know, for their part, that our country’s public deficit can always be reduced a little without too much difficulty thanks to an “exceptional tax”, to the elimination of niches taxes or manipulation of the indexation of tax bases. Bercy is a ministry of formidable efficiency. The tax collection rate approaches 100%. The French complain about objectively high and not always well-used taxes, but they pay them.
Second reason: at more than 16%, the French household savings rate is two points higher than its pre-Covid level, which was already high. Households that hold life insurance finance the public deficit. This capacity of the French to save constitutes a quasi-captive source of financing for our State. This reassures the markets.
Third reason: the European Central Bank implicitly guarantees the debt of the States of the euro zone. It is, on the contrary, this absence of guarantee which explains why the British public debt could be attacked on the bond markets this autumn, when the former Prime Minister Liz Truss tried to implement a reduction plan unfunded taxes. The ECB is our financial life insurance. This is why, if the European and Monetary Union is open to criticism in many respects, we must never forget that it allows us great and comfortable macroeconomic cowardice.
France has not defaulted on its debt since the Napoleonic wars. The markets see our country as an irrational pressure cooker, with poorly controlled public spending, with high but paid compulsory levies, a country that always ends up reforming itself, even if it is in indescribable pain. This balance holds, but it is fragile. This is why a serious economic policy should always emphasize investment in our future growth and the reform of the state.
