The Money Problem Fueling France’s Riots

protests have been raging across france for weeks this past saturday about half a million people took to the streets more than a hundred thousand in paris alone anyone who lives in central paris was sort of in the thick of it in all my years living in paris i have to say i i'd never seen it this bad before over the weekend the protests turned violent our colleague stacy miktree was there there was a moment where i was coming out of a theater and uh we were all told to stay inside because the sidewalk was being tear-gassed and what does it what does it look like i was walking down one of the avenues and literally it was just storefront after storefront that was smashed in i took a peek inside the one was like a motorcycle equipment shop everything was cleared out a few doors down i interviewed an electronics store owner and his place was just completely stripped bare i mean these you know these shop owners are really in shock you scenes like this are playing out all over the country in marseille in lyon and the smaller town of limoges i mean just to give you one example in the town of limoges which is you know famous for its porcelain but now unfortunately it's famous for its city hall getting ravaged by fires set by rioters how did these protests start they began as high school students protesting the conditions inside of schools class sizes a lack of available teachers but what started as a protest over school resources soon dovetailed with something else anger over massive potential cuts to social services next year's proposed national budget slashes 43 billion euros from the country's spending the reason these massive cuts are needed is because the country's debt is ballooning out of control rising interest rates have made it nearly impossible for france to finance itself i'm not sure whether the protesters fully grasp just how bad the fiscal situation is in france and in fairness to them you know they've for years for you know the past decade basically the french public has been sold the story which is that you really don't need to worry about the debt load and you're not going to be able to pay your bills and you're not going to be able to pay your bills welcome to the journal our show about money business and power i'm ryan knudsen it's friday october 23rd coming up on the show the ticking time bomb on france's balance sheet this episode of the journal is presented to you by accenture behind this podcast and the music you listen to spotify has a sophisticated advertising business accenture is deeply embedded in that business working with spotify to reinvent the rhythm of ad sales building maintaining and optimizing accenture finds the friction and builds the systems that make things run smoother and faster the result less time spent on operations more time connecting brands with the moments and fandoms that matter most learn more at accenture.com slash spotify this episode is supported by anthropic the team behind claude in business a wrong answer can cost you more than a slow one that's why nine fortune 10 companies now run on claude for the work they want to get right safety and accuracy are not just line items for anthropic that's their mission see how claude can support your business at claude.ai slash the journal the last time france faced protests like this was 2018 during something called the yellow vest movement back then truck drivers in their high visibility vests took to the streets over a tax increase on fuel among other things and they demanded government relief after weeks of massive disruptions french president emmanuel macron basically took to the streets to protest basically gave them what they wanted they were demanding he do something to you know cut back on fuel prices and to boost their purchasing power and he responded with you know roughly 10 billion euros in measures right and that helped calm the streets but what it also did was that it set a president which is every time there's a crisis it's time for the state to start spending again the same thing happened when covet hit france like many other countries poured money on the crisis so when covet came around france really blew the lid off of their spending macron rolled out a number of different programs increasing spending and cutting taxes he coined a slogan for the approach whatever it costs there was one program in particular where basically companies and when i say companies i'm talking about small time bistros on the corner to some of france's biggest corporations they were basically allowed to put their entire payroll on the state the state was funding the wages of all their employees and this program was designed to to last for you know basically the duration of covid lockdowns but what ended up happening instead is that they stayed on these programs for years but the spending was far from over it increased again in 2022 when russia invaded ukraine and fuel prices shot up macron rolled out an energy price cap that um the cost of state you know tens of billions of euros uh and that program continued to go on basically you know for years after uh the energy supplies sort of stabilized right and once your major companies once your households get accustomed to this it's just it's just very difficult to pull the plug yeah and so the french public is sort of been conditioned to think that whenever there's a crisis whenever whenever there's a problem you go to the state and the state is supposed to you know basically do a cash dump to uh to solve it for years all this spending wasn't a huge issue because france was able to fund much of it using massive amounts of cheap debt at the time interest rates were low around the world and france was paying rates near zero percent on the money it borrowed one of the lawmakers that i spoke to from macron's party uh had a had a term for it it's a he called it magic money so once macron started phasing out the programs that insulated the economy from covid in the ukraine war it sent a shock through the economic models the government uses for budgeting it turned out all this spending had been inflating the government's expected tax revenue so by ending it tax revenue started to fall by early 2024 french officials realized they had a of 40 billion euros in public accounts even though french leaders realized they had a major problem back in early 2024 the government didn't take drastic action and the can kept getting kicked down the road making major changes to the budget requires an act of parliament and in the spring of 2024 when macron may have had a chance to take this on he decided it wasn't time for a massive showdown there was an intense debate within his administration about whether macron could find the votes in parliament to pass major cuts and the government didn't take drastic action and the can kept getting kicked down the road paris was just about to host the summer olympics just to kind of like put ourselves in his shoes at that moment you know it was supposed to be sort of a time of celebration for for the country and it was supposed to be a sort of crowning achievement of emmanuel macron's presidency that same year in june macron had another issue on his hands his party was losing political power it had been trounced in the european parliamentary elections and macron wanted to take a bold step to try and turn things around so he decided to dissolve france's national assembly and hold snap elections macron's calculus in that moment was well first of all we're going to win the elections and had they won the elections of course they would have had a much stronger hand probably to correct these budget issues right unfortunately they did not win they did not win the election nobody won the election what ends up happening is that parliament gets fragmented into three blocks roughly of equal size and so it's completely hung parliament is paralyzed and at that point the finance minister and many other members of macron's government you know they realize that they have missed an opportunity here right because they can't pass these big budget cuts when there's three seats and they can't pass these big budget cuts when there's three seats and they can't pass these big budget cuts when there's three seats and they can't pass these big budget cuts when there's three seats and they can't pass these big budget cuts when there's three seats cuts when there's three seats and they can't pass these big budget cuts when there's three equal equal equal sort of blocks within parliament that can't sort of blocks within parliament that can't sort of blocks within parliament that can't agree with each other agree with each other agree with each other no it's impossible parliament has been deadlocked for two parliament has been deadlocked for two parliament has been deadlocked for two years years years there have been some tax increases for there have been some tax increases for there have been some tax increases for businesses but no major spending cuts. One prime minister after another has been ousted in recent years because they tried to restore fiscal order. You know, they tried to do some sort of basic spending cuts to try to get France back on track. And for their efforts, they were, you know, tossed out of office in no-confidence votes by a political opposition that's really, really fragmented. Investors, meanwhile, the ones who'd been lending all this money to France at near-zero interest rates, were watching all this play out. And they did not like what they were seeing. So France had been reliant on this super-cheap debt to help fund its government. At what point did interest rates start to rise? So it's been sort of gradual and then all at once. So, I mean, what investors expect is that when France is having fiscal issues or any country's having fiscal issues, you know, a government, needs to respond with a plan. And time and time again, we saw plans that were getting shot down. And so the country seemed like it was becoming more and more ungovernable. And it's really that sort of systemic dysfunction that started to drive up the interest rates. Which meant that era of magic money, when France could paper over the budget with cheap debt, was about to blow up in its face. That's next. That's next. We'll be right back. www.indeed.com slash podcast. Terms and conditions apply. Need a hiring hero? This is a job for Indeed Sponsored Jobs. People disagree about a lot in this country. Taxes, healthcare, education. But wherever you land politically, I think most of us agree on this. Better information leads to better decisions. That's the mission of USA Facts, to make government data clear and accessible. Because public data should be easy to access, trust, and understand, so we can use it to make informed decisions. Read and sign our open letter to support public data at usafacts.org. France is facing two financial problems. One, it needs to make major cuts to close its budget deficit. France is running deficits north of 5% of GDP. That's extremely high for a European country. Especially a Eurozone country where, you know, the individual member states don't exactly control their currency the way the U.S. does. And France has a mountain of debt, the payments on which are about to get a lot more expensive. Over the next three years, France is going to have to refinance roughly $1 trillion in debt. All of that debt has to be rolled over. And it's not going to be rolled over at 0%. I mean, if current rates hold, it's going to get rolled over somewhere near 5%. So, I mean, that is just an enormous burden for a country like France to shoulder. That's a huge increase in the cost to service all this debt. It's absolutely massive. Next year alone, the total interest on France's debt will hit around $360 billion. By 2030, interest payments could dwarf the country's entire military budget. To start addressing all this, earlier this month, French leaders put forward a bill to put forward a proposed 2027 budget with 43 billion euros in cuts. The French government obviously saw where yields were heading. They can see that they're under pressure from markets. And so they come up with a budget that they think is going to reassure investors. While that was a positive sign for investors, the cuts also sent the country into chaos and fueled those riots on the streets. What does this crisis say about how Emmanuel Macron has handled the country and the country's budget? I mean, the great irony here is that Macron, when he was elected in 2017, he was seen as like this sort of financial whiz kid. He was the former investment banker. And so the consensus on him was, you know, we're choosing him because he is the responsible economic steward, right? Macron's term as president is nearly up. In six months, the country will hold national elections. And the two leading candidates are making very different proposals when it comes to the debt and to the cause of the protests. On the far left, there's Jean-Luc Mélenchon. He's been marching with protesters and compared what's happening to the French Revolution. He said that for a big portion of France's debt, they should just basically, quote, throw it in the fire. Then, on the far right, you have Marine Le Pen, who's currently leading in the polls. She's proposing massive budget cuts while also adding billions to the deficit by lowering the retirement age. She blames the protests on immigration. The day after, you know, the worst of the riots happened this past weekend, Le Pen filmed a video address that, in terms of its style of presentation, was like very similar to a presidential address that's usually given on TV. You know, there was sort of like this bookcase behind her and a tricolour flag and she said, you know, that basically, once you elect me, six months from now, I'm going to restore order. Stacey, where do you see all this headed? I mean, there's two outcomes here to watch. The first is. There's sort of gradual strangulation effect, right? The more that France ends up paying to service its debt, the less that it can spend on actual public services, you know, to make the country function and to keep people off the streets, right? Then there's the other risk, which is less clear, which is, you know, will investors just start to give up? Could there be some kind of run on French debt? And, you know, that's a much scarier scenario. If there's a run on French debt, the European Central Bank, the ECB, might need to step in, like it's done in the past with Greece and Italy. I covered Italy's journey through the Eurozone debt crisis and, you know, it was really brutal for the country. You had a situation where many Italians felt like they were losing sovereignty to the ECB. In that situation, you're having to accept austerity measures and a certain loss of sovereignty. This is what's putting France in such a bind. The country can't solve these protests in the same way it's done in the past, by throwing money at it. Because right now, the money is the problem. Why does this story matter to anybody outside of France? I mean, in many ways, it's sort of a cautionary tale I mean, I go back to sort of what I said earlier about magic money and this belief that, you know, Western economies can just sort of load up on debt and the bill's never going to come due. You know, I think in the U.S., we also sort of operate under those assumptions in part because we benefit from sort of being the world's reserve currency. And that gives us a certain amount of slack that other countries don't have. But in the case of France, I think we're seeing what happens when, you know, the rubber hits the road, right? Your ability to borrow is being so massively constrained that it's almost making it impossible to govern the country. All President Emmanuel Macron can really do is, you know, cross his fingers, lean on the, you know, security and police forces to hope that somehow they manage to contain the violence. More protests are scheduled for this weekend in cities around France. Several places, including Marseille, Lyon, and Paris, have restricted demonstrations and enacted curfews to keep people off the streets. ♪♪ ♪♪ ♪♪ Thank you. That's all for today. Friday, October 23rd. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Chelsea Dulaney. The show is made by Catherine Brewer, Evelyn Fajardo-Alvarez, Pia Gedkari, Max Green, Sophie Codner, Matt Kwong, Colin McNulty, Jessica Mendoza, Imani Moise, Laura Morris, Enrique Perez de la Rosa, Sarah Platt, Alan Rodriguez Espinosa, Heather Rogers, Katie Shepard, Piers Singhi, Jivika Verma, Tatiana Zamis, and me, Ryan Knudsen. Our engineers are Griffin Tanner, Nathan Singapak, and Peter Leonard. Our theme music is by So Wiley. Additional music this week from Catherine Anderson, Peter Leonard, Emma Munger, Nathan Singapak, Griffin Tanner, and Blue Dot Sessions. Fact-checking this week by Nicole Pasolka. Thanks for listening. See you Monday. Hey, Ryan Reynolds here for Mint Mobile. Now, I don't know if you've heard, but Mint's premium wireless is $15 a month. But I'd like to offer one other perk. We have no stores. That means no small talk. Crazy weather we're having. No, it's not. It's just weather. It is an introvert's dream. Give it a try at mintmobile.com slash switch. 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