AXA IM: Restrictive action needed to keep the French debt trajectory under control
Gilles Moëc, AXA Group Chief Economist and Head of AXA IM Research, writes that while Europe benefits from stable and predictable economic policies, many countries—especially outside Germany—face tight budget constraints, and will need to cut spending, he zooms in on France.
'A particular issue for the EU – which is specific to its institutional setup – is that on top of finding an agreement with the US, maintaining consensus across member states could be a challenge. Still, given the volatility triggered by the new policy stance in the US, by contrast, Europe appears as a source of stability, while Friedrich Merz’ shift to a significant catch-up in public spending offered a source of optimism on the medium-term macroeconomic prospects for the Euro area, even if the impact is not likely to materialise quickly.'
Moëc adds: 'While Germany should be able to contribute positively to euro-wide economic activity in the years ahead, France will likely “pull in the other direction”, since a significant fiscal adjustment is unavoidable.'
He explains: 'While public debt has stabilised since the middle of the previous decade in the Euro area beyond the one-off shock of the pandemic, it has continued to rise in France. This deterioration in France’s relative position cannot be explained by weaker economic growth, as French GDP has been growing at a similar pace to the Eurozone average—slightly above 1% annually.'
Moëc concludes that lasting discretionary restrictive action will be needed in the coming years ahead to keep the French debt trajectory under control. 'This would offset some of the new German fiscal effort. Assuming no Euro-wide fiscal initiative materialises, this would likely put even more pressure on the ECB to maintain accommodative conditions for the Euro area as a whole. Of course, the central bank would probably want to be certain that such fiscal policy shift is effectively implemented to take it on board in its own reaction function, and this may necessitate a political clarification in Paris.'
