Public Finance are in a very bad situation Europe is clearly weak right now more specifically in the face of the election of Donald Trump I would say of 2025 things will start to get better uh because we can have more clarity on the political front first it was Germany now France another government Bites the Dust why has wrangling over spending toppled Europe's biggest economies and where next for a continent in crisis joining me is Charlotte deonier who's a senior Economist at in thank you very very much Charlotte for taking the time for us today um
a vote of no confidence in France's Parliament has kicked out the government this comes at a particularly sensitive time for the country doesn't it yes yes indeed because there are two things happening first of all uh economic growth is weakening so we can see that in most European country but clearly sentiments going down we have weaker economic growth ahead and then the second problem right now is that Public Finance are in a very bad situation actually in 2024 the deficit compared to GDP is expected to reach more than 6% and 6.3 probably for 2024 so
that's much too high and uh there is a big need of for any government to decrease this deficit and for that to increase taxes or to uh decrease expenses and that was the aim of Michel barer government they were trying to reach 5% of GDP deficit for next year that's was they prom they want it to do but uh of course the fact that no there is no government anymore means that they they are not going to be able to reach that point because the the the vote on the budget is not going to happen
at least not in the next few weeks and that of course means that uh there will be no tax increase or expenses Cuts in expenses going forward just directly so that will postpone uh the moment where Public Finance will be started to get a bit back in order yeah so Michelle B's prime minister just couldn't find the consensus within Parliament to be able to pass this budget through um we'll get into the a bit of the details on the budget in a second but why are French finances in such a difficult state right now yeah
it's um a bit the consequence of what happened during the past few years uh uh of course as in other country in Europe there was the pandemic the energy crisis but before that there was also the yellow vest crisis with a lot of protesters against increas in taxation so all of this uh at the end translates into higher expenses from the government so there was a lot of uh public spending used uh to buy peace I would say at a national level and uh that of course has increased quite strongly the depth and the expense
level of the French economy and at the same times there was a lot of cuts in taxation the the the aim of maon the the first aim of Macon was to boost the potential of the economy through what he called supply side policy so clearly helping the the potential of the economy to grow and one of the the thing he was uh willing to to do is to cut uh taxation including taxes for companies so the two together uh and a lot of crisis has let uh Public Finance in a very difficult situation and in
2024 we actually Reach the the highest level with deficit to GDP around 6.3% so it's much too high and then now there is a big effort to do which is of course the the the big problem of the government and that's why the reason they fall because big effort after a few years of where everyone was spending money and saying whatever it cost it's very difficult to make it true and to help uh to to to make it V vote actually yeah and so it was basically what Michelle B wanted to do was introduce a
package a mix of spending cuts and tax increases now of course no one likes tax increases but why was the budget so controversial because some um commentators have said that the French public and politicians have to accept economic pain or face a serious economic crisis further down the road yes indeed but uh it completely I mean it completely changed if you compare to the Past uh few years uh where there was not I mean there was no budgetary constraint anymore actually huh so uh it's really a shift and people have I mean are not really
willing to accept that they there is a need of tax increase or lower responses and so each and every party at the parliament they want uh to protect the people that vote for them and at the end since the parliament is very much divided in three Big Blocks it makes uh it makes it in almost impossible to reach an agreement because no one's want that anyone has to see uh the tax increase or the the cuts in in expenses so that's a bit uh the situation after a few years of whatever it cost as Emanuel
macron was always saying it's very difficult to change mind and that's the reason why there was I mean it was not possible to reach a compromise at the parliament but it also means that uh okay the president will try to uh nominate a new uh prime minister and a new government in the next few weeks but it will be all also very very difficult for any new government to reach an agreement on the budget H so the budget situation the the issue we have right now with no budget is likely to continue in the next
few month because any government will have a lot of difficulties to pass on budget where when you start with a very much a very deteriorated Public Finance situation okay so you're saying it's not just about the figures it's also about winning hearts and Minds which is the very difficult thing at the moment though I do want to take just a quick look at France's cost of borrowing looking at the 10-year bond yield um now it's remained Rel atively subdued after this kind of after the the no confidence vote essentially so does this mean that the
Panic of the government is overblown that yes things are difficult but in the end things will be okay what what can we infer from this I think there are a lot of bad news that were already Incorporated in the spreads H so it's and the the the actual vote uh of no confidence that lead to the fall of the of the government was actually uh I mean very much anticipated by the market so everything is still is already in there um it's means that uh okay there there is a worry on the Public Finance situation
of France uh there it's likely that the spreads are not going to go down in the future because as I explained uh there is no uh end of this political situation and difficult difficulties of voting the budget inside but also uh the situation is in France is not considered too dramatic either in the sense that uh markets and everyone knows that I mean at some point they will need to find a solution and they will find a solution they have means uh to increase taxation if uh they actually start to really believe that they need
to do it so uh it's not that we are afraid that France is not going to be able to meet uh its uh financial obligation or financial uh I mean what they need to to finance they year clearly but uh it make it more difficult to have a smooth path uh going back to a more normal level of deficit so spreads are probably going I mean will continue to be high but maybe it can even be a bit higher but we are not I'm probably not going to see it go through the roof because the
situation is not as dramatic as that I would say okay and looking to Germany where I'm talking to you from the situation is different but there are similarities there's also been a lot of difficulties here a coalition falling apart over Economic Policy how serious is it that both of these countries have weak leadership at the top yeah that that's a big issue actually for the Euro Zone I think because we know that we have a lot of sectoral challenge to uh to address and uh the the the report from Mario dragi uh explained most of
them are all the the issue we have regarding competitiveness and for of the industry sector in Europe weak growth in Europe and when uh there is no strong leadership in France and in Germany it means that probably it will be very difficult to to find agreements in order to start to start to to deal with those structural challenges challenges so I I really believe that it means that those structural challenges are not going to be addressed during the next few months and quarters and it also means that economic growth in Europe Europe generally will probably
remain quite weak because of all those political domestic political situation that are uh having the front seat at the end and not uh leading enough space leaving enough space in order uh for European authorities all together to start to do something for the weak growth situation in Europe so that's of course a very big concern uh let's see how it evolves but the EUR Europe is clearly weak right now and more specifically in the face of uh the election of Donald Trump uh with all the trade tariff and things that can happen it's clearly a
risk for growth for economic activity in Europe during the next quarters okay so certainly bad timing for all of this to be happening um now people accuse journalists and to some extent economists as well of talking about Doom and Gloom and highlighting the bad stuff where is the the room for optimism here can we end on a on a high now high note where is the the light at the end of the tunnel here good question um so I think the situation right now is France is very specific and that's uh we are likely to
see a lot of uh political uncertainty during a few months but at some point I believe uh they will Find A Way Forward uh so when you reach such a high level of uncertainty at some point it can only improve uh and that's a bit the same regarding economic growth of course everything that that is happening is a a risk for economic C activity during this winter but at some point uh we can hope and we hope that uh during the second half I would say of 2025 things will start to get better because we
can have more CL ity on the political front it can clearly help sentiment and there we could see a kind of recovery of economic activity so a very difficult period right now but it's not going to last forever and at some point uh we should see some kind of recovery I believe okay Charlotte de melier there on the battle between the hearts and minds and the raw figures thank you very much for your time
