When star forward Kylian Mbappé signed a three-year extension to his contract with Paris Saint-Germain in 2022, fans of the legendary soccer club were not the only ones who cheered.
French Finance Minister Bruno Le Maire boasted that Mr. Mbappé's decision to stay in Paris, after President Emmanuel Macron personally intervened to twist his arm, would generate a windfall in revenues for the French government. “He is going to pay a lot of taxes, and it’s a good thing that he pays them here rather than elsewhere,” Mr. Le Maire said at the time.
An analysis of Mr. Mbappé's earnings estimated that by far most of the PSG player’s €210-million ($312-million) annual salary would go to the French state in income and payroll taxes, making his decision to stay in Paris a fiscal shot in the arm for France.
The long-expected announcement on Monday that Mr. Mbappé will sign a five-year contract with 15-time European Cup-winning Real Madrid in Spain, where he is expected to pay a much lower tax rate, will now cost the French government hundreds of millions of euros. The timing could not be worse for Mr. Le Maire, who has come under increasing pressure from bond-market vigilantes to do something about France’s shambolic public finances.
On Friday, Standard & Poor’s downgraded France’s debt to AA- from AA after Mr. Le Maire reported a 2023 budget deficit that was “significantly higher than we previously forecast.” S&P said the 2023 shortfall reached 5.5 per cent of gross domestic product and is expected to remain above 5 per cent this year. France’s overall debt burden continues to rise – to about 112 per cent of GDP, up from 97 per cent before the pandemic – while the debt loads of most other euro zone countries are on a steady downward trajectory.
The rapid deterioration of French public finances since the pandemic is undermining Mr. Macron’s claim to European leadership. France’s debt-to-GDP ratio is now the third-highest in the 20-country euro area, after Greece and Italy. And French government expenditure as a proportion of the GDP remains the highest in the 27-member European Union, at 57.3 per cent – compared with about 41 per cent in Canada and 36 per cent in the United States.
Mr. Macron, a former investment banker who has made restoring France’s economic might the cornerstone of his presidency, has added more than a trillion euros to the country’s debt load since taking over in 2017. That is a more than 50-per-cent increase in just seven years. France now accounts for a quarter of all euro-zone debt, well above its 17-per-cent share of the region’s economy.
The growing divergence between French and German public finances – Germany’s debt-to-GDP ratio is at 63.6 per cent and falling – has increased tensions between Berlin and Paris. Mr. Macron has pushed for more EU fiscal integration and joint borrowing to fund European defence and industrial policies. But Germany worries that such moves would only encourage the same profligacy that led to the euro debt crisis after the 2009 recession.
Austerity measures forced on the so-called PIGS (Portugal, Italy, Greece and Spain) have since helped stabilize the euro zone. Portugal and Greece have emerged as models of fiscal rectitude. The former is running a budget surplus, and its debt-to-GDP ratio has fallen to below 100 per cent from 135 per cent in 2020. Greece ran a budget deficit of 1.6 per cent of GDP in 2023, despite a healthy primary balance surplus. Its debt-to-GDP ratio fell from 207 per cent in 2020 to about 160 per cent in 2023.
Mr. Le Maire played down the significance of Friday’s downgrade, insisting that the lowering of France’s credit rating would not affect investors’ appetite for French bonds. Still, the interest spread between French and German bonds has widened since the pandemic to around 50 basis points and could grow further in the coming months if Mr. Le Maire fails to make good on his promise to cut a total of €40-billion (about $59-billion) in spending this year and in 2025.
“Political fragmentation adds uncertainty regarding the government’s ability to continue implementing policies that increase economic growth potential and address budgetary imbalances,” S&P warned. “Without an absolute parliamentary majority, the government continues to face strong parliamentary and non-parliamentary opposition to some reform proposals – as demonstrated by widespread protests and strikes against pension reform in the first half of 2023.”
Mr. Macron’s government was able to push through the plan to raise the retirement age to 64 from 62 through a special decree – but only after weeks of paralyzing strikes that sapped his personal popularity and drove voters into the arms of the far-right Rassemblement National (RN), which vowed to set the retirement age at 60.
The RN is expected to trounce Mr. Macron’s Renaissance party in Sunday’s European Parliament elections, further complicating Mr. Le Maire’s attempts to win National Assembly approval to cut spending. He has already ruled out tax increases.
While France has recently boasted record foreign investment thanks to lower energy costs than in Germany and corporate tax cuts, Mr. Macron has been unable to reduce public spending despite courageous efforts to reform the country’s pension and unemployment insurance systems. The fiscal woes of the EU’s second-biggest economy raise red flags for the future of the entire euro zone.