The French economy only just avoided a recession in the second quarter. Extreme heat affected the agricultural sector, and the energy crisis resulting from the war with Iran put pressure on households and businesses. Yet these are not the real causes. The biggest problem is persistent uncertainty. Since Emmanuel Macron unexpectedly called a general election in mid-2024, parliament has consisted of three blocs of roughly equal size: the centre, the far-right Rassemblement National, and a left-wing coalition. None of the three has a majority. As a result, every government since then has struggled to pass a budget.

This uncertainty is also reflected in the figures. Businesses are postponing investments because they do not know what taxes and regulations lie ahead. Business investment grew by 4.5% in 2023, but has stagnated since then. In the first quarter of this year, it fell by 0.8% and by a further 0.3% in the second quarter. Consumers are also becoming more pessimistic.

A country that believes in its own decline

The mood is even gloomier than the figures suggest. In a recent poll, 85% of French people said their country is in decline. No less than 98% are dissatisfied with the current situation. This is reminiscent of the spring of 1789. At that time, France also had a crippling national debt, rising prices, and a rigid administration with an elite that had lost the public’s trust. Pessimism about one’s own nation is nothing new in France. Now, however, it is fuelling the rise of parties that want to dismantle the republic in its current form.

This creates a negative feedback loop: uncertainty hampers growth; weak growth makes it harder for the established parties to win over voters; and political fragmentation further increases uncertainty. Meanwhile, debt is mounting. France’s public debt rose to 119% of GDP in the second quarter, almost double the European benchmark of 60%. Last week, the yield spread between French and German ten-year bonds briefly rose above 1.5 percentage points, the highest level since the euro crisis. The French ten-year yield now stands just below 4.9%.

The streets as a second parliament

Added to this is the unrest on the streets. What began as a strike by school pupils in Créteil and Saint-Denis against overcrowded classrooms, dilapidated buildings and a shortage of teachers has descended into riots across the country. France has a long tradition of street protests, from the peasant revolts in the Middle Ages through May 1968 to the ‘Yellow Vests’ movement in 2018. That latter movement began as a protest against a rise in fuel tax and forced the government to back down.

French politicians have learnt a clear lesson from this: anyone who takes something away from the public will find the streets turning against them. Because reforming through parliament is so difficult, the streets have become a sort of second parliament. This is bad news for the budget, as austerity measures have become politically almost impossible.

The elections offer no way out

On 18 April, the first round of the presidential elections will take place in France. The decisive second round follows on 2 May. That offers little hope. Marine Le Pen leads in the polls with 31% to 36%. She wants the ECB to come to France’s aid as soon as public finances are in order. She does not say how she intends to achieve this. Jean-Luc Mélenchon, a sort of European Hugo Chávez, is vying for second place with 14% to 17% and wants to simply write off part of the national debt. Moreover, both candidates want to ignore European rules if they restrict French sovereignty. Le Pen wants to amend the constitution, if necessary via a referendum. Mélenchon wants a Sixth Republic in which parliament holds all the power.

Meanwhile, the political centre is fragmented. Thirty-four candidates have already come forward, most from the centre-left and centre-right. All these minor candidates are taking votes away from one another. As a result, the likelihood is growing that the second round will be a contest between the two extremes.

Emmanuel Moulin, the governor of the Bank of France, warned this week that France is in danger of being strangled by interest rates. In his view, intervention by the ECB is not on the cards at present, as the ECB combats inflation and does not resolve budgetary problems. Mélenchon described his remarks as treason. The political climate has become so polarised that even the central bank is under fire. There is a strong likelihood that this fragmentation will simply continue after 2027. Incidentally, there is a strong likelihood that the ECB will intervene with the TPI as soon as the spread between OATs and German Bunds exceeds 200 basis points.

The franc as a logical way out

From an economic perspective, there is a solution that almost no one dares to mention out loud: France leaves the eurozone and reintroduces the French franc. A national currency can be devalued, thereby restoring competitiveness. A national central bank can control interest rates. The majority of France’s national debt is governed by French law and can therefore be converted into francs. Inflation would then wipe out part of the debt.

France is well acquainted with this path. After the war, the country devalued the franc time and again, and under Mitterrand a further three times between 1981 and 1983. The euro has closed that safety valve. Those unable to devalue must adapt through lower wages, austerity measures and unemployment. This is precisely what French voters have been rejecting for years, taking to the streets if necessary. Leaving the eurozone is no picnic. There is a risk of a bank run, capital controls and widespread panic on the markets. But it would put an end to a situation that could now drag on for years.

Why it won’t happen

Yet this way out is almost certainly closed off. Europe is under pressure from two sides. Trump is putting the European Union under strain with import tariffs and political pressure. Putin is threatening the eastern border. A disintegrating eurozone would be the best possible gift for both of them: a divided and weakened Europe. As a result, the euro is no longer merely an economic project, but a matter of security.

Brussels and Berlin will therefore do everything in their power to keep France on board. That means the other eurozone countries will have to bear the brunt of France’s problems. This could be achieved through asset purchases by the ECB, despite Moulin’s comments. It could be achieved through more shared European debt, such as via the recovery fund and defence spending. And it could be achieved through higher interest rates and higher inflation for everyone in the eurozone.

The frugal ones are the ones who lose out

In hindsight, it is ironic that there are still eurozone countries striving for a balanced budget to limit their national debt. In a monetary union with a tacit mutual guarantee, the frugal country pays twice. First, it makes cuts at home. Then it acts as a guarantor for the countries that do not.

For a long time, the Germans tried to impose their will on the other eurozone countries: austerity, the ‘schwarze Null’ (zero deficit), and strict conditions for Greece during the euro crisis. Germany has now itself let go of the debt brake. It is now France’s turn to set the standard: budget deficits, a strong role for the state and the ECB as a safety net. It won’t be long before we’re all French.

More columns by Han Dieperink