What is the nature of France’s fiscal problem?

Here is a report today from William Horobin:

Until now, many of the deficits have been transferred to a little-known vehicle set up to pay down the social-security system’s overdrafts with a special tax. But the vehicle—called Cades—is quickly approaching the legal ceiling of €270 billion ($360.4 billion) of debt it is permitted to handle over its lifetime.

To breach the Cades threshold and plow in more debt, the government is bound by law to increase the special tax. But faced with at-times violent street protests over taxation, Mr. Hollande has pledged to stop raising taxes, saying the government instead must help companies regain competitiveness and preserve household spending power. As a result, Mr. Hollande’s government is considering leaving the debt load where it is, in the social-security system, instead of moving it to Cades.

The national audit office and many lawmakers are crying foul, saying the stockpile of deficits sits on the books of a social-security system designed to manage cash flow, not long-term debt, and is leaving the system vulnerable to an increase in interest rates.

“It’s creating a time bomb,” said Philippe Marini, a center-right senator who heads the finance commission of the French Parliament’s upper house.

The debate over where to store the debts underscores the shrinking room France has to maneuver in grappling with deficits tied to its generous, and underfinanced, welfare programs.

If you read the whole article, you will see this concern is held by many individuals in the French establishment, not just by Olli Rehn.  More generally, I would say that the most fundamental problem seems to be willful denial amongst the citizenry and a strong unwillingness to reform, for instance:

“You cannot take away guns from Americans, and in the same way you cannot take away social benefits from French people,” said Louis Paris, who lives on the Rue Louis Braille, a typical neighborhood in St Etienne, which has deep working-class roots and historically has leaned Socialist. “They won’t stand for it,” said Paris.

Sweden had a period where its government spent too much money, yet they snapped out of it and cut spending and marginal tax rates, like good, pragmatic Swedes.  We’ve yet to see serious signs that the French are going to do the same.  They certainly don’t have much if any room to raise taxes any further.

The point here is not to argue that the French economy is on the verge of collapse.  It isn’t.  But they do have serious fiscal problems which go beyond a static look at the usual metrics.


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