A text “at the service of finance and not of France”? During the examination of the pension reform in the Social Affairs Committee at the end of January, the rebel deputy François Ruffin fired red balls against the government’s project to raise the legal retirement age to 64 years. For the elect of the Somme, the executive justifies the urgency of his project with considerations of “false budget” when his main motivation would be quite another: to reassure the financial markets.
An angle of attack reinforced a few days ago by Alain Minc’s statements. Invited at LCI, the essayist and liberal economist made people talk about it by properly judging “unthinkable that the reform should not pass and for a reason that power does not dare to say, or cannot say.”
And to clarify his point: “We have 3000 billion in debt. (…) The interest rate we pay is very close to that of Germany, which is a kind of perhaps undeserved blessing.” However, “the market is a primary being. If you see that we have increased the (retirement) age, you will consider that France is still a serious country. (…) And when we are debtors of 3,000 billion euros, we are attentive to what our creditor thinks”, recalled the former political adviser.
According to him, a resignation from the government would dangerously raise interest rates on French debt, threatening France’s ability to finance itself on the markets. “Imagine that 1% more is 150,000 million in ten years,” warned Alain Minc, before reaching the following conclusion: “This reform has a symbolic meaning to which we must agree to give in, regardless of the concessions that will have to be made” .
Fear of rising interest rates
The reaction of central banks to counter the return of inflation has already led to a gradual increase in interest rates in recent months and has officially ended the era of “free money”. Now the yield on French 10-year debt is close to 3%, whereas in mid-2021 it was close to 0%. As a result, the debt burden has skyrocketed: to €31 billion in 2021, it reached €42 billion in 2022 and should exceed €50 billion this year.
It is in this context that Bercy rang the hour of sobriety. After having invested hundreds of billions of euros in the economy to protect homes and businesses during the health and energy crises, Bruno Le Maire announced at the end of January a significant reduction in public spending from 2024. “Whatever the cost, it’s over,” said the Minister of Economy. A promise of a return to budgetary seriousness thanks to which the Government hopes to protect itself from any risk of runaway rates and thus guarantee the sustainability of the French debt.
The executive, however, assures that the priority objective of the pension reform is elsewhere, the latter having above all the vocation of “saving the pay-as-you-go system”, while generating more wealth to finance projects in education, energy transition or health. However, at RMC and BFMTV, Bruno Le Maire acknowledged that the postponement of the legal age of departure was also part of a more general desire to strengthen France’s credibility, particularly in its ability to clean up its public accounts.
“The oppositions do not see that the issue (of the reform) is not simply the pension system. It is that either we all work more collectively, or France will become more impoverished (…) “Or we restore the public accounts in the coming months because we are returning to a normal economic situation, or we will pay higher interest rates and have an ever-increasing debt load,” said the economy minister.
Really receptive markets?
If the pension reform provides (intentionally or not) guarantees to investors, it will “have no impact” on markets, says Christopher Dembik, director of macroeconomic research at Saxo Bank. Contrary to Alain Minc, this economist estimates that the effect on rates will be nil, “even if the government gives up”. And it would have been the same “if he had set out to retire at 70”.
Essentially focused on the action of central banks against inflation, this Franco-French issue is “a non-event” for international investors, he continues. At this stage, “the foreign investor does not care about the balance of the French pension system. (…) It is not at all an element that the markets take into account”, unlike the reforms “on the flexibility of the hand labor market” that can have “a real impact.
Certainly, a pension reform could have had an impact on the rates at which an emerging country borrows, but not on those at which France is financed, a “developed state that continues to be attractive”, judges the economist, although he acknowledges that it is a “reform that appeals to international institutions such as the IMF”.
JP Morgan Asset Management strategist Vincent Juvyns also believes the pension reform “will have no short-term effects on markets.” However, he “shows that France ensures long-term budget balances.” He affirms that “in its current version, the reform will contribute to increasing the participation rate in the labor market”, which should allow “boosting growth and reducing spending”. Enough to reinforce the confidence of international investors and “strengthen the firm of the French State”.
Source: BFM TV
