France has become one of the most financially troubled countries in Europe, with an outsize debt and deficit that are likely to keep ballooning despite efforts by a fragile new government to address the problem, the Fitch Ratings agency said on Friday.
A day after France’s new prime minister, Michel Barnier, introduced a tough austerity budget aimed at mending the nation’s rapidly deteriorating finances, Fitch issued a negative outlook for France’s sovereign credit rating. The rating was left unchanged at an AA– level for now, but Fitch warned that it could be revised lower if the government’s budget plans fall apart.
The outlook reflects greater financial risks that have swirled in France since President Emmanuel Macron dissolved the lower house of Parliament in June and took until last month to appoint a new government. The episode left Parliament deeply divided, split nearly evenly between warring political factions on the left, right and center, and leaving Mr. Barnier with no clear majority. That will make it harder to pass a belt-tightening budget and assuage nervous international investors at a time when France’s national debt has ballooned to more than 3 trillion euros ($3.28 trillion).
In a statement late Friday after Fitch’s announcement, France’s economy minister, Antoine Armand, said the government was determined “to turn around the trajectory of public finances and control debt.”
France is the second-largest economy among the 20 countries that use the euro currency, and as such, is considered too big to fail. European Union rules require members to have sound finances, including capping debt at 60 percent of economic output and not letting government spending exceed revenues by more than 3 percent.
But France is now well in excess of both of those limits, drawing a formal rebuke recently from the European Union. France’s debt has spiraled to more than 110 percent of economic output, the worst in the bloc after Greece and Italy. Fitch warned that the debt could surge to more than 118 percent of gross domestic product by 2028 if nothing is done. The annual budget deficit is set to widen to 6.1 percent of gross domestic product this year, much higher than expected, and an increase of more than 10 percent from last year.
The turmoil comes amid a rough patch in the French economy, as a variety of factors take a toll on growth, including the wars in Ukraine and Gaza, high interest rates and economic slowdowns in Germany and China, two of France’s trading partners. The economy is expected to expand by a little over 1 percent next year, but French finance officials warned this past week that major budget cuts could hurt the economy.
The austerity budget that Mr. Barnier introduced includes plans for 60 billion euros (about $65.6 billion) in savings next year through a set of tax increases on the rich and businesses and big cuts to social programs and government spending. But Fitch cautioned that France also needed to stop an infernal spiral in which interest payments to service the country’s ever-growing debt required more and more government spending.
France is paying 50 billion euros this year alone to service the debt, a bill that could rise to 80 billion euros in 2027. The debt payment is already so large that it eclipses France’s budget for national defense. The interest payments are likely to eat up nearly 5 percent of all the money that the government collects in tax and other revenue by 2026 if nothing is done, Fitch said.
Paris had been increasingly concerned about French debt being downgraded by international rating agencies, which would further increase its borrowing costs. Standard & Poor’s downgraded France’s debt rating earlier this year, and the Moody’s ratings agency warned of a downgrade amid political turmoil this summer. Moody’s will issue a new outlook for France later this month.
The nation’s finances are deteriorating after Mr. Macron unleashed a spending spree in recent years to shield businesses and households from an energy crisis, and increased spending to stimulate the economy and hiring. Local governments also spent beyond their means. But France’s tax revenues shrank drastically last year, the legacy of major tax breaks that Mr. Macron created for businesses and wealthy individuals to make France a more attractive place to invest.
Given those dynamics, Fitch said France was unlikely to meet its own target of cutting the deficit to below 3 percent by 2029 without significant (and politically unpopular) belt-tightening. Despite the proposed cuts to government spending, which include lower payouts for health care and pensions, the government will continue to ratchet up spending on the military because of Russia’s war in Ukraine. France is also splurging on renewable energy projects to keep up with European Union mandates to cut its carbon emissions by 2030, Fitch noted.
And France’s political situation remains fragile: Warring parties in Parliament may demand tough concessions for the budget to pass when it comes up for a vote at the end of the month, Fitch noted. Mr. Barnier is already facing competing calls to revise the budget, including demands by centrist parties not to raise taxes on the rich and corporations. Right and far-right parties — which now make up about a third of Parliament — want him to find more places to reduce government spending, including support for immigrants.
In the event of an impasse, Mr. Barnier might be forced to push through the budget with an executive order. But that could prompt a vote of no confidence in Parliament and potentially cause a collapse of his government. “High political fragmentation and a minority government complicate France’s ability to deliver,” Fitch said.
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