Europe’s second-largest economy is too wealthy, too productive and almost has a top credit rating for that. The next government can therefore also take on new international debt relatively easily.
What is surprising is how calmly the markets react to the fall of the government. The leading index of the Paris Stock Exchange was up on Thursday, as if nothing had happened. The euro rose and even previously avoided government bonds did not come under selling pressure. The major US rating agencies have France on their watchlist, but the country’s credit rating is still close to triple A.
Whether it stays that way in the long term depends on the solution to the government crisis and the presentation of an austerity package, as Barnier wanted. France is sitting on a debt mountain of 3,200 billion euros. This amount represents 110 percent of economic output and the third highest debt ratio in the eurozone behind Greece and Italy.
ECB could help in an emergency
Even in the worst-case scenario, if it is not possible to reduce the deficit from this year’s 6.1 percent towards the permitted three percent, i.e. if the mountain of debt continues to grow, there is no danger for the common currency. Given the problems in Germany and Italy’s high debt burden, it would be a rather unfavorable time to test the solidarity of the euro partners. But unlike more than a decade ago, today the ECB in Frankfurt can step in directly.
Under certain conditions – should this ever become necessary – the monetary authorities are allowed to buy up unlimited amounts of French bonds via their “transmission protection instrument” TPI. “The mere fact that the ECB can intervene should prevent a spillover to other countries and should also not drive French yield spreads to the heights that were reported in 2011,” says Thomas Gitzel, chief economist at the German VP Bank.