France’s public debt has reached €3.4-trillion, thrusting President Emmanuel Macron’s government into a crisis.LUDOVIC MARIN/Reuters
The fall of another French government this week was a clear sign that an increasingly isolated President Emmanuel Macron has overstayed his welcome at the Élysée Palace, with almost two-thirds of voters calling on him to resign before the end of his second term in 2027, an unprecedented development in modern French politics.
“Never before have so many French people envisaged what had long been considered a taboo in the Fifth Republic: the resignation of the head of state,” the Odoxa polling firm noted in a survey released on the eve of a confidence vote in the National Assembly that brought down the nine-month-old government of now ex-prime minister François Bayrou.
Mr. Bayrou was collateral damage amid an intractable debt spiral that the French political class has been unable, or unwilling, to address. His proposal to cut €44-billion ($71-billion) from the 2026 budget was met with Bastille-level hostility by opposition parties on the left and right of Mr. Macron’s dwindling centrist coalition, and the French population in general.
And so, Mr. Bayrou went stoically to the guillotine, though not before delivering this parting shot at lawmakers: “You have the power to overturn the government, but you do not have the power to erase reality. And the reality is inexorable.”
That reality is government debt of €3.4-trillion ($5.5-trillion) and counting, soaring debt-service costs as interest rates return to normal levels and anemic economic growth as the public borrowing to pay for current spending crowds out private investment. Bond markets are on edge waiting for the next shoe to drop – a recession or an even worse economic shock – unleashing a full-blown debt crisis from which it could take decades to recover.
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The worst part of it all is that France is hardly alone among Western countries in edging closer to the fiscal precipice; it may not even be the first Group of Seven country to go over it. Since the onset of the 2008 financial crisis, G7 governments have borrowed their way out of every economic rough patch. They threw open the spending floodgates during the COVID-19 pandemic and have made no meaningful attempt since to shut them.
The average ratio of net-debt-to-gross-domestic-product among the G7 is now about 95 per cent, compared to 55 per cent in 2006. For the better part of a decade, this debt accumulation was encouraged by some of the world’s most influential economists, who argued that interest rates would remain at historically low levels because of “secular stagnation” in Western economies beset by aging populations and weak demand.
How is that working out? The world is awash in government debt, with no end in sight as Western countries ramp up defence spending without cutting elsewhere. Investors are demanding to be compensated for the rising risk of default as leaders across the G7 demonstrate a singular lack of political will to rein in their deficits.
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Britain’s Labour government is nearing a meltdown as backbenchers in Prime Minister Keir Starmer’s caucus rebel against any social spending cuts and as markets lose faith in Chancellor of the Exchequer Rachel Reeves’s ability to square the budget circle.
Canada is not in much better shape, no matter how much progressive economists try to spin the numbers.
Former prime minister Justin Trudeau and ex-finance minister Chrystia Freeland championed the “secular stagnation” thesis to run ever-larger deficits. Where did that get us? Combined federal and provincial net debt has nearly doubled since the 2008 financial crisis to $2.3-trillion, or almost 75 per cent of GDP.
That might not look so bad on paper, at least compared to other G7 countries (excluding Germany). But unlike France and Italy, which can count on the European Central Bank to bail them out, there are limits to what the Bank of Canada could do to rescue governments here. And unlike the U.S. greenback, which remains the world’s reserve currency, the Canadian dollar is hardly considered a “safe haven.”
Indeed, Canada could be particularly vulnerable if global bond markets turn sour. And that day could come soon.
U.S. President Donald Trump inherited a budget deficit of 6.4 per cent of GDP. But Mr. Trump’s policies will dig the world’s biggest economy into an even deeper hole, one that cannot be plugged with revenue from tariffs on U.S. trading partners. If anything, Mr. Trump’s trade war could be a tipping point that pushes the global economy over the cliff.
“Debt and financial crisis tend to occur precisely when a country’s fiscal situation is already precarious, its interest rates are high, its political situation is paralyzed, and a shock catches policymakers on the back foot,” Harvard University economist Kenneth Rogoff writes in the current issue of Foreign Affairs. “The United States already checks the first three boxes; all that is missing is the shock.”