The Daily Telegraph: France is no longer part of the eurozone core And EU is now seen as a bureaucratic leviathan

The British newspaper The Daily Telegraph has published an article discussing the growing financial instability in France. Caliber.Az offers a revised version of the piece.

France has long enjoyed what has been described as an “exorbitant privilege” within the EU, able to borrow at the low German interest rates due to its status as a cornerstone of the European project. Markets have assumed that EU institutions would always support France, regardless of its actions. However, there are growing concerns that this assumption may no longer hold true.

There is a real possibility that the Barnier government will collapse within the next month without passing a budget, as it struggles to control its mounting fiscal deficits, which threaten the unity of the monetary union. "The governability of France is being called into question more than I have ever seen in my lifetime," said Moritz Kraemer, former head of sovereign ratings at Standard & Poor’s.

The risk spread of French 10-year bonds over German Bunds spiked to 83 points on Tuesday, the highest since the eurozone debt crisis in 2012. However, this spread does not fully reflect the gravity of the situation. "The markets are waiting for a credible response but nobody can see where it is going to come from and there doesn’t seem to be any sense of urgency," Kraemer added. "The French are playing with fire. Nobody in the markets still thinks that France is still part of the eurozone core. These spreads are a loud and clear warning," he noted.

S&P will decide on Friday whether to further downgrade France’s debt after cutting its rating to AA- in May. While France is not at immediate risk of a crisis like Greece's default, it is increasingly entering a "grey zone."

Kraemer suggested that the European Central Bank might eventually be forced to intervene, potentially using its "spread protection tool" (TPI) to purchase French debt. However, he warned, "This could only go on for a couple of months; then there would have to be a proper adjustment," which would likely require austerity measures, including spending cuts, tax hikes, and significant reforms, if the IMF and the EU bailout fund (ESM) were to step in.

This would entail "really brutal upfront austerity" that could have politically toxic consequences. "The politics would be absolutely toxic because the ECB’s president is a former French finance minister," Kraemer said. Any such intervention would require approval from the German Bundestag, the Dutch Tweede Kamer, and other northern creditor states, creating the potential for a highly explosive political showdown.

The chances of the current French parliament agreeing to stringent reforms seem close to zero, especially with the balance of power held by the Left-wing Popular Front and the Right-wing National Rally, both of which protect France's costly welfare model.

The EU’s Mercosur trade agreement with Latin America also adds another layer of political tension. If imposed on France against its strong objections, it could lead to a deeper rupture between the French people and the EU power structure.

There is a widespread assumption that the ECB will intervene to keep French bond yields suppressed, as it did for Italy in the past. As some cynics suggest, "Isn’t that why Emmanuel Macron pushed so hard to secure the top job for France’s Christine Lagarde?" However, post-Covid inflation has made this approach increasingly problematic. Any attempt to continue such policies could lead to internal conflict within the ECB’s governing council.

The French government is fully aware of the risks, with the budget deficit reaching 6.1% of GDP this year and projected to climb higher. "If we don’t act, the mechanical dynamic of public spending could push it to 7% in 2025," said Laurent Saint-Martin, the budget minister. Prime Minister Michel Barnier is calling for fiscal tightening of €60 billion, though this figure is closer to €45 billion, warning that without it, France is heading for a financial crisis.

Yet Barnier faces opposition even within his coalition, with finance minister Macron loyalists publicly criticizing his proposed tax hikes. The National Assembly has become a chaotic arena of self-interested factions, further complicating the political landscape.

Marine Le Pen's National Rally holds significant sway in the current government, and she has threatened to deal a "kiss of death" to the coalition if attempts to pass the budget by decree succeed. Le Pen has set a "red line" over the cost of living, with 73% of her supporters seeking Barnier's removal.

Professor Thomas Mayer, former chief economist at Deutsche Bank, argues that the political foundations of the monetary union are collapsing. "The eurozone core is melting down. Markets can see that public finances are out of control and that France is moving into the Italian camp," he said.

In Germany, there is growing division over how to approach the crisis. "The orthodox view is that Germany must stick to sound finances even if it becomes the sole anchor of the euro. At least we will still have a halfway respectable currency," said one source. But there are increasing calls to abandon fiscal discipline entirely, reflecting deeper dissatisfaction with the EU’s direction.

Mayer predicts that the EU, now seen as a bureaucratic leviathan, poses a rising threat to Germany’s core interests. "Our government is going to have to confront the European Commission head-on. It is imposing more and more directives on everything. It’s simply horrific," he said.

Ultimately, Macron’s "grand bargain" with Berlin, which aimed to restore fiscal discipline in France and unlock new EU financial powers, has failed. "It is dead in the water," Kraemer concluded. "There is no realistic constellation of political parties in Germany that would agree to it."

While France may avoid a full-blown financial crisis for the time being, the long-term damage is clear. Without fiscal union, the euro remains a fundamentally unstable construct.