French Budget Crisis Risks Bond Shock as ECB Refuses Blanket Bailout

The Economist

Post-crisis institutional firewalls will isolate French sovereign debt turmoil, allowing bond market pressure to force Paris into fiscal discipline rather than triggering a broader euro-zone collapse.

AI-assisted summary of Will France blow up the euro zone? | The Economist — original source. Check the original for full context.

Source published: 2026-10-23

Key ideas

France's national debt servicing costs are on track to surpass its spending on both education and national defense this year amid mounting deficits and bond market strain. (0:00)
Unlike during the 2010s debt crisis, modern ECB mechanisms are structured to isolate sovereign bond pressures to individual member states rather than triggering bloc-wide contagion. (1:13)
Unconditional support for French debt is politically impossible in Germany, where the anti-bailout AfD party is polling near 30%, hardening Berlin's resistance to fiscal leniency. (3:24)
Economists predict France may face Liz Truss-style bond market turbulence, but institutional guardrails and strong public support for the euro will prevent a breakup of the single currency. (7:23)

Detailed notes

## Background Published on YouTube by The Economist on October 23, 2026, this episode features hosts Henry Curr and Mike Bird alongside Sophie Pedder and Christian Odendahl. The program explores France's compounding street unrest and surging borrowing costs, analyzing whether mounting fiscal deficits and political gridlock could ignite another severe euro-zone crisis.

## TL;DR France is caught in an acute fiscal bind as debt servicing costs overtake education and defense spending, while populist political platforms push to lower the retirement age and undo essential pension reforms. The panel explains that unlike during the 2010s crisis, modern European Central Bank mechanisms are engineered to isolate market pressure on Paris and prevent contagion across the euro zone. Unconditional bailouts are politically untenable in northern Europe, particularly in Germany, where the rise of the Alternative for Germany leaves mainstream leaders no latitude to subsidize French deficits. Ultimately, the analysts conclude that while France will likely suffer a Liz Truss-style sovereign bond shock, widespread public support for the euro will compel French policymakers to muddle through rather than trigger a currency breakup.

## Atmosphere & style The discussion carries a sober, intellectually rigorous tone that balances alarming on-the-ground accounts of violent protests with cool-headed macroeconomic analysis. The dynamic between the editors is fluid and collegial, featuring sharp institutional debates and an undercurrent of sentimentality as Mike Bird makes his final appearance on the show. Listening feels like attending a measured, high-level briefing that de-escalates headline panic into an orderly assessment of political and economic constraints.

## Bulletin - [00:00](https://www.youtube.com/watch?v=q2uVRZougS8&t=0s) France's national debt servicing costs are on track to surpass its spending on both education and national defense this year amid mounting deficits and bond market strain. - [01:13](https://www.youtube.com/watch?v=q2uVRZougS8&t=73s) Unlike during the 2010s debt crisis, modern ECB mechanisms are structured to isolate sovereign bond pressures to individual member states rather than triggering bloc-wide contagion. - [03:24](https://www.youtube.com/watch?v=q2uVRZougS8&t=204s) Unconditional support for French debt is politically impossible in Germany, where the anti-bailout AfD party is polling near 30%, hardening Berlin's resistance to fiscal leniency. - [07:23](https://www.youtube.com/watch?v=q2uVRZougS8&t=443s) Economists predict France may face Liz Truss-style bond market turbulence, but institutional guardrails and strong public support for the euro will prevent a breakup of the single currency.

## Key takeaways - [00:00](https://www.youtube.com/watch?v=q2uVRZougS8&t=0s) Violent street demonstrations in France demand expanded public spending even though the state has exhausted its fiscal room for manoeuvre. - [00:00](https://www.youtube.com/watch?v=q2uVRZougS8&t=0s) Pensions constitute the largest single expenditure in the French budget, making pledges by both political extremes to lower the retirement age a severe threat to fiscal stability. - [00:00](https://www.youtube.com/watch?v=q2uVRZougS8&t=0s) France expects to spend more on servicing sovereign debt this year than on either its education or defense budgets. - [01:13](https://www.youtube.com/watch?v=q2uVRZougS8&t=73s) Post-crisis institutional reforms ensure the ECB can ring-fence contagion, meaning bond market pressure will be applied specifically to France rather than spreading across the periphery. - [01:13](https://www.youtube.com/watch?v=q2uVRZougS8&t=73s) ECB backstops remain strictly conditional on member states demonstrating clear macroeconomic reasonability and credible efforts to rein in deficits. - [01:13](https://www.youtube.com/watch?v=q2uVRZougS8&t=73s) Historical standoffs with Greece and Italy demonstrate that individual national governments cannot ultimately prevail against the ECB and sovereign bond markets. - [03:24](https://www.youtube.com/watch?v=q2uVRZougS8&t=204s) France's role as an indispensable EU anchor country makes ECB enforcement stricter rather than more lenient, to prevent a moral hazard crisis at the core of the union. - [03:24](https://www.youtube.com/watch?v=q2uVRZougS8&t=204s) While Greece in 2010 was completely shut out of credit markets, France retains functional bond market access and merely faces slightly elevated risk premiums. - [03:24](https://www.youtube.com/watch?v=q2uVRZougS8&t=204s) Leniency toward French deficits would provoke severe political backlash in fiscally conservative nations like Germany and the Netherlands. - [03:24](https://www.youtube.com/watch?v=q2uVRZougS8&t=204s) The rise of the AfD in Germany, polling around 30%, removes any political room for German leadership to tolerate euro-zone bailouts or fiscal free passes. - [07:23](https://www.youtube.com/watch?v=q2uVRZougS8&t=443s) Analysts anticipate France could endure a bond market shock comparable to the UK's 2022 Liz Truss episode to force political consensus on spending cuts. - [07:23](https://www.youtube.com/watch?v=q2uVRZougS8&t=443s) Broad popular support for the euro across member states is materially higher today than during the 2010–2012 sovereign debt crisis. - [07:23](https://www.youtube.com/watch?v=q2uVRZougS8&t=443s) The capitulation of Greece's Syriza government in 2015 illustrates how European institutions systematically compel populist administrations to accept macroeconomic discipline.

## Detailed walkthrough ### [00:00](https://www.youtube.com/watch?v=q2uVRZougS8&t=0s) Street Protests, Surging Deficits, and the French Budget Trap

The conversation opens with Sophie Pedder recounting firsthand reporting from Bordeaux over the weekend, where she covered violent demonstrations and observed that “the scenes of devastation were really quite shocking.” The unrest compounds an already acute economic dilemma for the French government: while public demonstrators demand substantial new spending on priorities such as education, Paris is operating in an environment where it simply has no money left to spend. The state is under acute pressure to curb budget deficits and push through expenditure cuts, yet it faces deep post-election political instability that obscures the future direction of fiscal policy and makes legislative approval of the budget an uphill struggle.

```mermaid flowchart TD accTitle: French Budget Dilemma Under Political Pressure accDescr: Visual flowchart tracing the structural budget trap in France from street protests and political promises down to debt servicing costs.

subgraph Political_Pressure["Political Pressures"] A["Street Protests in Bordeaux<br/>Demanding Education Spending"] B["Hard-Left & Hard-Right Pledges<br/>(Mélenchon & Le Pen: Lower Pension Age)"] end

subgraph Fiscal_Reality["Fiscal Reality"] C["Pensions = Single Largest Spending Item"] D["Mounting Deficits & Spending Cut Requirements"] end

subgraph Debt_Trap["Bond Market Squeeze"] E["Spooked Sovereign Bond Markets"] F["Debt Servicing Costs Exceed<br/>Education and Defense Budgets"] end

A --> D B --> C C --> D D --> E E --> F ```

The underlying numbers reveal a severe fiscal squeeze: France expects to spend more this year on servicing its national debt than on either education or defense. Sovereign bond markets have been further unnerved by the policy platforms put forward by political extremes on both sides. Both hard-left leader Jean-Luc Mélenchon and hard-right leader Marine Le Pen have campaigned on economic programs pledging to reduce the national retirement age. Because pension expenditure represents the single largest item in the French state budget, lowering the pension age renders any serious deficit reduction virtually impossible.

- France’s debt servicing costs are on track to surpass its spending on defense and its spending on education. - Public spending cuts are heavily constrained because pensions represent the single largest expenditure category in the French budget. - Economic platforms from both Jean-Luc Mélenchon (hard left) and Marine Le Pen (hard right) pledged to lower the retirement age, directly spooking sovereign bond investors.

---

[01:13](https://www.youtube.com/watch?v=q2uVRZougS8&t=73s) The ECB’s Playbook: Conditionality and "Macroeconomic Reasonability"

Turning to the prospect of a severe French fiscal crisis that echoes the European sovereign debt crisis of the 2010s, Henry Curr notes that the European Central Bank (ECB) would be the decisive actor. Christian Odendahl explains that the euro area has evolved fundamentally since the early 2010s. Back then, there were no institutional firewalls or containment mechanisms, meaning doubts about one troubled country quickly cascaded into runs on Italian, Spanish, and Portuguese sovereign debt. Today, the institutional architecture and the ECB are explicitly engineered to ensure contagion is contained and that market discipline is applied specifically to the country responsible.

Christian highlights that while markets recognize the ECB stands behind sovereign debt, that support is strictly conditional. Central bankers demand fiscal responsibility: “One ECB director once called it, the ECB expects macroeconomic reasonability.” This does not demand adherence to every fiscal regulation down to the letter, but it requires unmistakable intent to rein in excessive deficits. Looking at past confrontations involving Greece and Italy, Christian argues that no national government can prevail in an outright clash against the ECB backed by sovereign bond markets. If Paris refuses to demonstrate macroeconomic reasonability, Frankfurt will simply stand back and allow bond market pressures to mount on France alone.

- Unlike during the 2010s debt crisis, post-crisis EU institutions exist to ring-fence contagion and isolate sovereign bond pressures to the offending country. - Precedent from past showdowns with Greece and Italy indicates that individual member states cannot win a protracted standoff against the ECB and market forces.

---

[03:24](https://www.youtube.com/watch?v=q2uVRZougS8&t=204s) Anchor Country Dilemma and the Moral Hazard of a French Bailout

The panel debates whether France’s political weight changes the balance of power. While France is one of the twin engines of Europe alongside Germany, Christian Odendahl argues this status cuts both ways. Because France is an indispensable anchor country of the European Union, the ECB and Germany cannot simply hand it an unconditional bailout without throwing the legitimacy of the entire European project into question. For that very reason, Frankfurt must enforce discipline even more rigorously to avoid putting “a crisis at the heart of the EU.”

Henry Curr and Mike Bird explore the disastrous implications of an ECB surrender: if a game of chicken ensues and Frankfurt blinks by printing money to back French debt without structural adjustment conditions, the monetary union’s fiscal framework effectively collapses. Mike contrasts France's position with Greece in 2010. Greece was completely locked out of sovereign credit markets, leaving zero moral hazard because nobody viewed Greece’s punishing experience as an enticing blueprint. France, by contrast, still enjoys an orderly, functional sovereign bond market, simply paying a modest risk premium.

If France were permitted to run massive deficits and maintain an earlier retirement age while relying on the ECB as a backstop, public consent in fiscally conservative nations like Germany and the Netherlands would disintegrate: “Well, why are we bothering, you know, why why do we uh why do we try and balance our own budgets? Why do we try and apply sensible fiscal rules if everyone just simply gets a free pass from the European Central Bank or from other institutions uh if they don't do any of it?” Politically, German latitude for compromise has vanished. The Alternative for Germany (AfD)—originally founded as an anti-euro bailout movement—is polling near 30%, making it politically suicidal for mainstream German politicians to approve concessions or bailouts for French profligacy.

- Greece in 2010 lost all bond market access, while France currently retains fully functional, orderly bond market access at slightly elevated borrowing costs. - The Alternative for Germany (AfD), founded in opposition to euro bailouts, polls at roughly 30%, eliminating political wiggle room for German leaders to countenance financial rescues.

---

[07:23](https://www.youtube.com/watch?v=q2uVRZougS8&t=443s) Predictions: Truss-Style Turbulence or Euro-Zone Breakup?

Wrapping up the discussion, Henry Curr puts the panel on the spot: will France blow up the euro zone? Christian Odendahl rejects the doomsday scenario, arguing that institutional mechanisms will exert the precise amount of economic pressure required to force Paris into fiscal responsibility over time. Henry Curr offers his own forecast, predicting that France will likely experience a bond market shock reminiscent of the UK's 2022 Liz Truss episode, though it will fall short of destroying the common currency: “I think Europe will find a a way to model muddle through but it will get harder before it gets easier.”

Mike Bird, making his final appearance on *Inside Economics* before departing *The Economist*, agrees that France will not blow up the euro zone. He observes that since the 2010s, European integration has proven remarkably effective at moderating radical populist movements once they assume power. Recalling his reporting from Athens in 2015 when the far-left Syriza government seemed poised to reject bailout terms and risk euro exit, Mike notes that Syriza was ultimately forced into submission by the institutional machinery of the EU. Crucially, broad public support for the single currency across member states is significantly higher today than it was before or during the euro crisis. Ultimately, while bond turbulence and domestic politics will worsen before improving, the overwhelming public desire to stay inside the euro will force French policymakers to retreat from the brink.

- Henry Curr predicts France will face a "Liz Truss-like bond market crisis" that tests French politics without causing a systemic euro-zone collapse. - Public polling reveals that popular backing for the euro across the currency bloc is materially higher today than during the 2010–2012 sovereign debt crisis. - The 2015 Greek precedent—where the radical Syriza administration capitulated rather than exit the single currency—serves as the blueprint for how European institutions compel populist leaders to accept macroeconomic constraints.

## Notable quotes > [07:23](https://www.youtube.com/watch?v=q2uVRZougS8&t=443s) I think Europe will find a a way to model muddle through but it will get harder before it gets easier. — Henry Curr

## Mentioned Henry Curr, Mike Bird, Sophie Pedder, Christian Odendahl, Jean-Luc Mélenchon, Marine Le Pen, Liz Truss, The Economist, Inside Economics, European Central Bank, Alternative for Germany (AfD), Syriza, France, Germany, Greece, Italy, Spain, Portugal, Netherlands, Bordeaux, Paris, Frankfurt, Athens

## Video description France’s streets are on fire—and so are its finances. Soaring borrowing costs mean its debt is becoming more expensive to service. If the prospect of passing even meagre spending cuts in next year’s budget is implausible, the fiscal discipline that is ultimately required feels completely out of reach. Could France’s woes spark another euro-zone crisis?

Henry Curr and Mike Bird are joined by Sophie Pedder, The Economist’s Paris bureau chief, and Christian Odendahl, our European economics editor, to discuss whether France is about to blow up—and whether it could bring the euro zone down with it.

#france #economics #europe #markets #finance

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[Source](https://www.youtube.com/watch?v=q2uVRZougS8)

中文简报

欧洲央行拒绝全面救助，法国预算危机恐引发债券市场冲击后危机时代的制度防火墙将隔离法国主权债务动荡，使债券市场压力迫使巴黎遵守财政纪律，而非引发更广泛的欧元区崩溃。由于债务偿还成本超过教育和国防支出，加之民粹主义政治纲领推动降低退休年龄并废除必要的养老金改革，法国正陷入严峻的财政困境。专家小组解释称，与2010年代的危机不同，现代欧洲中央银行机制旨在将市场压力隔离在巴黎，以防止危机在整个欧元区蔓延。在北欧，无条件救助在政治上是行不通的，尤其是在德国，德国选择党（AfD）的崛起使得主流领导人没有任何余地去补贴法国的赤字。最终，分析人士得出结论，尽管法国可能会遭遇类似利兹·特拉斯时期的主权债券冲击，但公众对欧元的广泛支持将迫使法国决策者勉力过关，而不是引发单一货币的解体。在赤字不断增加和债券市场承压的背景下，法国今年的国债偿还成本预计将超过其在教育和国防方面的支出。 (0:00) 与2010年代的债务危机不同，现代欧洲央行的机制结构旨在将主权债券压力隔离在个别成员国之内，而不是引发全欧范围的蔓延。 (1:13) 对法国债务提供无条件支持在德国政治上是不可行的，反对救助的德国选择党民调支持率接近30%，这加剧了柏林对财政宽容的抵制。 (3:24) 经济学家预测，法国可能会面临类似利兹·特拉斯式的债券市场动荡，但制度护栏和公众对欧元的强力支持将防止单一货币解体。 (7:23)

Reading summary

Despite mounting French deficits, political gridlock, and street protests, an outright breakup of the euro zone remains unlikely because European Central Bank mechanisms and political realities will discipline Paris. Domestic Political Gridlock and France's Fiscal Trap (0:00) France faces an acute fiscal dilemma as street demonstrations demand new public spending while the state has exhausted its budgetary headroom. After witnessing violent demonstrations in Bordeaux, Sophie Pedder observed that the unrest compounds the government's struggle to enact spending cuts amid post-election political instability. The underlying public finances are severely constrained: France's debt servicing costs are on track to exceed its spending on either education or defense. Sovereign bond markets have grown anxious because public spending cuts are structurally limited by pensions, the largest single expenditure in the budget. Further complicating matters, both hard-left leader Jean-Luc Mélenchon and hard-right leader Marine Le Pen campaigned on lowering the national retirement age, an agenda that would make substantial deficit reduction virtually impossible. ECB Conditionality and Ring-Fenced Market Discipline (1:13) If fiscal tensions escalate into a sovereign debt showdown, the European Central Bank (ECB) serves as the decisive arbiter. Unlike the early 2010s European sovereign debt crisis—where the absence of institutional firewalls triggered contagion across Italy, Spain, and Portugal—Christian Odendahl explains that the euro area's modern architecture is engineered to ring-fence contagion and apply discipline specifically to the offending state. ECB support for sovereign debt remains strictly conditional on what central bankers term 'macroeconomic reasonability.' Past confrontations with Greece and Italy demonstrated that national governments cannot prevail in an outright conflict with the ECB backed by financial markets. If Paris refuses to demonstrate credible commitment to reining in excessive deficits, Frankfurt is prepared to stand back and allow sovereign bond market pressures to mount on France alone. The Moral Hazard of French Bailouts (3:24) France's position as an indispensable anchor country alongside Germany complicates any potential intervention. Odendahl argues that an unconditional ECB backstop would jeopardize the legitimacy of the entire European project, obliging Frankfurt to enforce fiscal rules strictly to avoid embedding a crisis at the core of the union. Mike Bird notes a critical distinction from the 2010 Greek crisis: Greece had completely lost sovereign debt market access, presenting no moral hazard, whereas France still maintains an orderly, functional bond market while merely paying a modest risk premium. Unconditional ECB aid to France would erode public support in fiscally conservative nations like Germany and the Netherlands. In Germany, mainstream politicians have virtually no leeway to tolerate French fiscal divergence, particularly with the anti-bailout Alternative for Germany (AfD) polling near 30%. Market Correction Rather Than Currency Dissolution (7:23) The panel concludes that France will not cause the collapse of the single currency, anticipating instead severe political and financial friction. Henry Curr forecasts that France may experience a bond market shock comparable to the United Kingdom's 2022 Liz Truss episode, predicting that Europe will find a way to muddle through as conditions worsen before improving. Drawing on his reporting from Athens in 2015, Mike Bird highlights how the radical Syriza administration was forced to capitulate to European institutional constraints rather than exit the common currency. Furthermore, broad public support for the euro across the bloc is significantly higher today than during the 2010–2012 sovereign debt crisis. This enduring public commitment, combined with institutional market discipline, is expected to compel French leaders to retreat from fiscal brinkmanship. While France faces structural debt servicing costs and volatile domestic politics, the euro zone possesses the institutional firewalls and conditional ECB backstops needed to contain contagion and force fiscal compliance, ruling out a systemic breakup.

精炼阅读摘要

《经济学人》（The Economist）分析指出，法国当前的政治动荡和预算赤字虽然对国债市场构成严峻压力，但欧洲央行的条件性政策工具以及欧盟的制度化防线，将有效遏制危机蔓延并迫使法国重回财政纪律，欧元区并不会走向解体。法国财政困局与养老金政策死结 (0:00) 法国正深陷严峻的预算陷阱。据 Sophie Pedder 观察，波尔多周末爆发的示威活动演变为暴力破坏，抗议者强烈要求增加教育等领域的公共支出，然而法国政府在财政上已面临资金匮乏的现实。选举后的政治动荡加剧了预算立法的难度。更为严峻的是，法国今年的国家债务利息支出预计将超过国防预算和教育预算，使财政紧缩成为迫切要求。极左翼与极右翼的经济纲领进一步打击了国债市场信心。极左翼领袖让-吕克·梅朗雄（Jean-Luc Mélenchon）和极右翼领袖玛丽娜·勒庞（Marine Le Pen）均主张降低法定退休年龄。在法国国家预算中，养老金支出是单一规模最大的开支项目，降低退休年龄的竞选承诺几乎堵死了任何实质性削减赤字的可能性，直接引发主权债券投资者的恐慌情绪。欧洲央行的条件性支持与宏观合理性 (1:13) 面对法国财政危机的潜在冲击，Henry Curr 与 Christian Odendahl 强调欧洲央行（ECB）将是决定性力量。Odendahl 指出，与 2010 年代初不同，当前欧元区已建立制度性隔离防火墙，防止某国风险直接演变为针对意大利、西班牙或葡萄牙债务的全面挤兑。现行架构旨在将市场惩戒压力精准隔离在出问题的单一成员国身上。尽管市场清楚欧洲央行是主权债务的后盾，但该项支持附带极为严格的条件。欧洲央行要求成员国表现出“宏观经济合理性”（macroeconomic reasonability），即展现抑制过剩赤字的明确政治意图。回顾希腊和意大利的历史先例，没有任何一个成员国政府能够在与欧洲央行及主权债券市场的正面对峙中取胜；若巴黎拒绝纠正财政赤字，欧洲央行将选择退后，任由债券市场压力独自施加于法国。核心国道德风险与德国政局制约 (3:24) 法国作为与德国并列的欧盟核心支柱，其特殊地位对危机处置构成了双刃剑。Odendahl 认为，正因为法国不可或缺，欧洲央行和德国更无法提供无条件的财政救助，否则将动摇整个欧洲一体化项目的合法性，因此法兰克福必须更加严格地执行纪律。Curr 与 Mike Bird 补充道，若央行在博弈中让步、无条件印钞为法国债务兜底，货币联盟的财政规则框架将彻底瓦解。法国与 2010 年的希腊存在本质区别。当时希腊被彻底排除在主权信贷市场之外，因而并未引发道德风险仿效；而法国目前仍享有有序运转的债券市场，仅需支付温和的风险溢价。若允许法国在维持高赤字和低退休年龄的同时获得央行兜底，德国和荷兰等财政保守型国家的民意支持将会崩溃。尤其在德国国内，最初因反对救助欧元区危机而成立的德国选择党（AfD）民调支持率已接近 30%，这使得德国主流政治家在政治上毫无妥协或救助法国财政放纵的空间。特拉斯式市场震荡与民粹妥协前景 (7:23) 针对法国是否会炸毁欧元区的核心疑问，与会专家一致排除了这一末日预案。Odendahl 认为制度机制将施加恰到好处的经济压力，迫使巴黎回归理性。Curr 则预测，法国更可能经历类似于英国 2022 年利兹·特拉斯（Liz Truss）时期的国债市场震荡，这种市场测试会使政局经历严峻阵痛，但最终欧洲仍能艰难过关，情势在好转之前会先恶化。 Bird 指出，自 2010 年代以来的历程表明，欧洲制度体系在驯服民粹主义政权方面极为有效。例如 2015 年希腊激进左翼联盟（Syriza）即便最初抗拒救助条款，最终仍在欧盟制度机制前屈服。此外，当前成员国公众对单一体制货币的支持度明显高于当年的欧债危机时期。留在欧元区内部的普遍民意，将最终迫使法国政治决策层在悬崖边选择退让。《经济学人》团队一致判断法国不会导致欧元区解体，但法国国内的财政僵局如何化解仍悬而未决。在巨额养老金负担、国内公众的支出诉求与欧洲央行强硬的宏观合理性要求之间，法国政治领导层究竟需要付出多大代价的市场震荡才能促成紧缩共识，将是接下来的核心考验。

Source quotes

[7:23] Henry Curr: I think Europe will find a a way to model muddle through but it will get harder before it gets easier.

Original transcript

[0:00] This would put a crisis at the heart of [0:01] the EU and that would be really really [0:03] dangerous. [0:04] >> I was in Bordeaux at the weekend [0:06] covering the riots and I have to say [0:08] that the scenes of devastation were [0:11] really quite shocking. [0:12] >> Does the French government have a chance [0:14] of getting a handle on this? [0:16] >> Well, it's difficult because some of the [0:17] demands are for more spending on [0:19] education. The French government has no [0:21] money to spend on any budgets. It's [0:23] trying to cut budgets. It's trying to [0:25] curb its budget deficits. There is such [0:27] a lot of uncertainty about what would [0:30] happen in France after the election. [0:31] That's making it both difficult now for [0:34] anyone to sort of predict the future [0:36] direction of French fiscal policy, but [0:37] it's also making it difficult now to get [0:39] the budget through given that the French [0:41] is French are expecting to spend more [0:44] servicing their debt this year than they [0:46] do either on education or on defense. [0:49] One of the things that spooked the bond [0:50] markets was both candidates um from the [0:53] hard left and the hard right. So that's [0:55] Jean Melosha and Marine Le Pen uh have [0:58] presented economic programs which [1:00] involve trying to bring down the the [1:02] pension age. Now if you want to reduce [1:05] spending in France, the pension spending [1:07] is the single largest item and you can't [1:10] do that if you bring down the pension [1:11] age. Let's talk about uh what happens if [1:14] things uh do get worse and you have an [1:17] economic crisis in France that resembles [1:20] in some sense the European debt crisis [1:22] of the 2010s because then pretty much [1:26] the most important player on the scene [1:27] is going to be the ECB. Christian, it's [1:30] it's your job to watch the ECB for the [1:32] economist. How prepared do you think [1:34] they are for a scenario in which you [1:36] have more crazy economic policy and [1:38] perhaps a bond market crisis in France? [1:40] I think it's really important that at [1:41] the time of the Euro crisis there were [1:44] no institutions to contain this to the [1:46] countries that were actually in trouble [1:48] and so we had this spreading uh into [1:50] other countries because suddenly markets [1:52] start asking questions about Italy about [1:54] Spain about Portugal and so forth. That [1:57] is no longer the case. I think markets [1:58] understand that if there is a problem [2:01] with France, the institutions that have [2:03] been created and the ECB will try to [2:05] make sure that it stays in France and [2:07] that the pain is administered by markets [2:09] to France alone. The ECB has matured [2:12] itself as an institution. It understands [2:15] and I think markets understand that the [2:17] ECB stands behind government debt under [2:21] conditions, right? Um, and it has also [2:25] shown that there is a limit to what the [2:27] ECB is willing to do if the countries [2:30] are not playing their part. One ECB [2:32] director once called it, the ECB expects [2:34] macroeconomic reasonability. I thought [2:37] this was a good way to capture it, [2:38] right? It's not, you know, maybe not [2:41] adherence to the fiscal rules of in [2:44] every letter and every paragraph, but it [2:46] is showing macroeconomic reasonability. [2:48] And then this dynamic comes into play [2:50] that markets know the ECB will step in [2:52] if governments do their part. And then [2:55] the question is will do governments do [2:57] their part. But I think the lesson of [2:59] for example Italy is you cannot win [3:01] this. You cannot win and Greece as well. [3:03] You cannot win against the ECB. You [3:04] cannot win against sort of the threat of [3:06] markets. And so I think you know any [3:08] idea of you know [3:11] uh of from France that does not suggest [3:15] that France is willing to bring down the [3:16] deficit and show this kind of [3:18] macroeconomic reasonability will mean [3:20] the ECB will wait and see how the pain [3:23] uh spreads across France. [3:24] >> But you are essentially saying that in a [3:26] showdown between France and the ECB you [3:28] think the ECB wins despite France's you [3:31] know [3:33] France is one of the two most important [3:34] players politically in the Euro zone. [3:36] Right. But I think that there there two [3:37] ways to think about it. The first is [3:39] exactly as you say, France is such an [3:40] important country. It's one of the two [3:42] parts of the European engine with [3:44] Germany. Um and so it it wields much [3:47] more power um inside Europe. But you can [3:49] also flip this and say, okay, because [3:52] France is so important, it can only work [3:55] if France does its part, right? And the [3:58] ECB and Germany knows that they cannot [4:00] just, you know, make the ECB bail out [4:01] France. is then then you're putting [4:03] questions at the very heart of this [4:05] European project. So I'm not sure that [4:07] the fact that France is bigger and more [4:09] powerful necessarily mean that that the [4:11] ECB were more lenient. You could also [4:13] make the argument that to the contrary [4:15] the ECB there needs to be tough because [4:17] France is supposed to be one of the two [4:19] anchor countries of this entire project [4:21] including the EU itself. Right? This [4:23] would this would put a crisis at the [4:25] heart of the EU and that would be really [4:27] really dangerous. Mike, this is where [4:29] the the threat to the Euro zone [4:31] ultimately comes from because, you know, [4:33] if Christian's wrong about that and the [4:35] French resist uh attempt by the ECB to [4:39] uh impose fiscal discipline before they [4:41] get support in the bond markets from the [4:43] from the central bank. Uh then there's a [4:46] game of chicken and the ECB loses and [4:49] ends up creating money to guarantee [4:52] French debts without any adjustment [4:54] program. That's sort of it for the Euro [4:56] zone, right? because you can't have the [4:57] monetary union without the fiscal [4:59] stability. [5:01] >> No, completely. And I think that's it [5:02] for the the politics of it as well. And [5:04] I think the distinction here with what [5:06] happened with Greece and some of the [5:08] other troubled countries in uh 2009, 10, [5:13] 11, 12 is is really useful. France can [5:17] go to the bond market right now. France [5:19] can borrow more. It borrows at a [5:21] slightly higher interest rate, but [5:22] French bond markets are functional. um [5:25] they're orderly in relative terms. You [5:28] know, this is just a rational risk being [5:31] priced in. Greece couldn't go to the [5:33] bond market at the worst of it. There's [5:35] not a lot of moral hazard there. Nobody [5:37] was looking at Greece in 2010 and [5:39] saying, "Oh, well, if we can get a [5:40] bailout, you know, why don't we just do [5:42] what Greece did?" It wasn't an [5:44] attractive proposition. If France can [5:46] simply run large deficits, if French [5:49] people can retire earlier than anyone [5:51] else in uh in in the rich countries, the [5:54] Euro zone, it starts to look to I think [5:58] uh voters in Germany, in the [6:01] Netherlands, in lots of other countries. [6:03] Well, why are we bothering, you know, [6:05] why why do we uh why do we try and [6:07] balance our own budgets? Why do we try [6:09] and apply sensible fiscal rules if [6:12] everyone just simply gets a free pass [6:14] from the European Central Bank or from [6:16] other institutions uh if they don't do [6:18] any of it? And I think that's the sort [6:20] of political difficulty here. And and [6:23] giving France a free pass in that sense [6:25] would be extremely dangerous. Even if [6:27] you think in the short term it's [6:29] important financially, I think [6:30] politically it would undermine [6:32] everything um potentially forever. It [6:34] would be really really dangerous. I [6:36] think we need to also look at the other [6:38] countries and their politics. So just to [6:41] remind everyone that the German [6:42] alternative for Germany was founded as [6:46] an anti- Euro bailout party and if they [6:49] are as they currently are polling at 30% [6:52] the wiggle room the sort of political [6:54] room for maneuver for German politicians [6:56] to agree to any kind of bailout is [6:59] extremely limited. That was different [7:01] back then where the AFD didn't even [7:04] exist and where there was a centrist [7:05] consensus that you know this whole [7:07] project needs to be kept stable. Uh now [7:10] with the AFD at 30%. Um it's a it's a [7:13] much much more difficult proposition. So [7:14] this hard ride populist uh politics in [7:18] Europe doesn't really work with bailouts [7:21] at all. Okay, fascinating discussion. [7:24] Now it's prediction time. Time to put [7:26] everyone on the spot. So our question [7:28] today was, will France blow up the Euro [7:30] zone? Christian, what do you think is [7:32] going to happen? [7:32] >> Well, I as a German, I would say [7:34] absolutely not. And um no, I think I [7:38] think there are sort of the institutions [7:39] in place to contain the problem and to [7:42] put the the right amount of economic [7:44] pain on France so that France maybe it [7:46] takes a while, but France will get it [7:48] act together. But I will give my view [7:49] which is that I do think France will [7:51] face a a Liz trusslike bond market [7:53] crisis that the UK faced but I don't [7:56] expect it to blow up the Euro zone. I [7:58] think Europe will find a a way to model [7:59] muddle through but it will get harder [8:01] before it gets easier. Uh Mike, I'm [8:03] going to let you have the last word here [8:06] uh because uh for anyone who doesn't [8:07] know Mike is sadly leaving the [8:09] economist. So this will be his last [8:10] appearance on Inside Economics. So Mike, [8:13] for your last uh uh contribution, which [8:16] way are you going to go? Will France [8:17] blow up the Euro zone? [8:20] >> Famous last words, but I think no. And [8:23] if you can say one thing in favor of the [8:25] European Union, it has done very well [8:28] since the Euro crisis in turning [8:30] populist parties that actually reached [8:32] uh government into more sensible forces. [8:36] I know that might sound crazy, but uh I [8:38] was in Greece in 2015 reporting when it [8:42] looked very plausible that Greece would [8:44] reject its bailout. um and and [8:47] potentially have to leave the Euro zone. [8:49] It was then run by uh far-left [8:51] government in the form of Sir and they [8:54] were beaten into submission by the [8:55] forces of uh European integration. [8:58] Effectively, Greek people chose that [9:00] they did not want to leave the European [9:02] Union. If you look at polling, support [9:04] for the euro for the single currency is [9:06] actually considerably higher today [9:08] across the currency union than it was at [9:11] the time of the Euro crisis or even [9:12] before the Euro crisis. I think when the [9:15] rubber hits the road and I think it [9:16] probably has to get a lot worse before [9:18] it reaches this point and it's a real [9:20] question of whether France wants to [9:22] leave the Euro zone or any country wants [9:23] to leave the Euro zone. There will be a [9:25] political push in the other direction. [9:28] Um things might have to get quite bad [9:29] before we get there but I think it would [9:32] resolve itself that way.