France will have to face the discipline of the global debt markets on its own. The European Central Bank (ECB) cannot legitimately intervene to hold down French borrowing costs unless, and until, the country faces a full-blown financial crisis.
If the ECB were to abuse its legal powers to let France off the hook, it would set off a political and legal storm, and further erode German confidence in the management of the euro.
“France will have to face fiscal reality and dig itself out of the hole that it has dug itself into,” said Holger Schmieding, chief economist at Germany’s Berenberg Bank.
“Nobody on the governing council wants to get mixed up in a French problem. The ECB will intervene only if there is contagion to other countries, or if the spreads reach ludicrous levels,” he said.
That point has not been reached. There is no contagion. Risk spreads on 10-year French bonds over German Bunds have settled at around 80 basis points, and have not risen further since the collapse of the Barnier government.
The market reaction is so far surprisingly gentle, given the dangerous pyrotechnics of Emmanuel Macron over the last two and a half years – which have rendered France literally ungovernable with a fiscal deficit heading towards 7pc of GDP next year.
Some suspect that he would prefer a harsh verdict from the bond vigilantes. The worse the spread, the easier it is for him to justify recourse to Article 16 – the constitutional clause that allows him to assume emergency powers. The “Korean” solution, without the added touch of stormtroopers.
Agnès Verdier-Molinié, the director of French Institute of Public Administration and Politics (IFRAP), says the sorcerer’s apprentices who blocked the budget and defenestrated Barnier on Wednesday have set off a chain of events that they may regret. She thinks Macron will up the ante, invoking the fiscal crisis to pull the trigger on Article 16.
The powers can be invoked if there is a threat to the “execution of France’s international obligations”. Benjamin Morel, a political scientist at Paris-Panthéon, said Macron could reasonably argue that failure to pass a budget prevents the country from fulfilling its EU treaty commitments.
He told Ouest-France, the French newspaper, that France is the only country in Europe where the president can assume these pleins pouvoirs at his own discretion. “Everywhere else it is a separate body that authorises them,” he said.
Charles de Gaulle invoked Article 16 in 1961 following the Algiers putsch by retired army officers. It gave him the temporary powers of a Roman dictator, which he rolled over for almost six months, spicing it up with eyewash about a Communist “revolution from the inside”.
Activation of the clause requires both a “grave and immediate” threat, and a breakdown in the regular functioning of the state. The Constitutional Council can issue an opinion after 60 days. “It remains only an opinion. It does not oblige the president to change tack,” said Mr Morel.
Would Macron really pull such a stunt? Perhaps, if his next premier faces instant dismissal. He might calculate that his enemies could never command the two-thirds majority in both the assembly and the senate necessary to impeach him. But if he did take this fateful step, the nation would erupt. He raised the spectre of “civil war” in June. Article 16 almost invites it.
France risks slow ruin – as does Britain – but it does not face an imminent financial crisis. French spreads approached Greek levels last week but that is a nonsense story, promoted by Barnier himself in a catastrophist effort to sell his rejected budget. Greece is shielded from market forces. Most of its bonds are held by bail-out bodies.
French debt has an average maturity of 8.6 years. It takes a long time for higher borrowing costs to feed through. The growth rate of nominal GDP is still above the average interest rate. Debt dynamics have not yet succumbed to a snowball effect, though that safety margin could vanish if the eurozone core relapses into recession, which may already be happening.
Nevertheless, French yields have been higher than Spanish or Portuguese yields for months. This is an extraordinary development and a warning to the French political class that their country no longer enjoys an exorbitant privilege as co-anchor of monetary union.
The ECB cannot salve French amour propre. It was able to prop up high-debt countries during the deflation years by purchasing €5 trillions (£4.1 trillions) of bonds under the cover of quantitative easing. That is no longer impossible.
The bank has since invented an anti-spread shield (TPI) but has never dared to use it, and for good reason – it is highly contentious and a flaming violation of the no-bail clause in the Lisbon Treaty.
The ECB arrogated to itself the power to buy distressed bonds as it sees fit, but only on behalf of countries that pursue a) “sound fiscal and macroeconomic policies”; b) are not “subject to an excessive deficit procedure”; c) do not have “severe macroeconomic imbalances”; d) where the “trajectory of public debt is sustainable”; and e) where stress is “not warranted by country-specific fundamentals”.
France is in breach of every one.
Markets are betting that the ECB will find some way around this. No doubt it will, in extremis. But Isabel Schnabel, Germany’s enforcer on the governing council, has a message for them. The TPI can only be used to “tackle disorderly dynamics” and to “prevent destabilising interest rate spirals, which might otherwise drag the euro area into a severe crisis”.
Any sustained help would require a “macroeconomic adjustment programme”, which means an austerity package by the EU bail-out fund (ESM) – and probably an IMF regime, given the scale of France’s €3.3 trillion debt.
This would come with tough conditions and require a vote in the German and Dutch parliaments. There is zero possibility that Left-wing Popular Front or Marine Le Pen’s Eurosceptic nationalists would accept such terms, or any terms at all.
Macron is back at square one, but in an even weaker position, amid mounting calls for his own resignation. “No confidence, no government, no budget, no solution,” was the pithy verdict of Arnaud Marès, chief European economist at Citigroup.
The idea of a technocrat coalition is a fool’s illusion in a great political nation like France. There are only two permutations that can plausibly deliver a government. Both are explosive.
Either Macron swallows his pride, lets the Left take charge as the largest bloc, throws what remains of his inglorious party behind it in cohabitation, and accepts that much of his seven-year edifice will be torn down.
Or, he eats his rhetoric, lifts the cynical cordon sanitaire that is so corrupting French politics, accepts that Le Pen’s 11m voters are a legitimate political community, and reaches a pact with her National Rally, ministers and all.
That is to say, he must do overtly what he has been trying to do on the sly whilst hiding behind Barnier. This would lead to a general strike and mass demonstrations, but it would lance the boil.
Macron caused this crisis by systematically destroying the centre-Left and the centre-Right, aiming to construct a nouvel ordre in the centre for his own Jupiterian glorification.
He succeeded in the first part, even if in nothing else. He refused to back down when this blew up in his face in 2022, opting ever since to ram through his agenda against popular and parliamentary will by executive decree.
Nothing can be resolved until Macron either falls on his sword or learns the meaning of democracy and falls on his knees at Canossa.
For his next stunt, will Emmanuel Macron invoke emergency powers?
The impact of the French president’s dangerous pyrotechnics is making it easier for him to justify recourse to Article 16