Low and negative interest rates: remedy and threat for Europe’s public finances


Euro-denominated debt is one of those sought-after assets, especially when issued by Germany, whose robust economy is reassuring. It is also sought after when issued by France, which is an impressive first feat for the country. [TaxRebate.org.uk/Flickr]

From Saturday (24 July) onwards, G7 leaders will discuss the global economic situation in Biarritz, France. The discussion will likely focus on extremely low-interest rates, which represent both an opportunity and a risky temptation for over-indebted European countries. EURACTIV France reports.

Negative interest rates are turning out to be a surprising, yet welcome recipe for the French budget. In 2019, France has saved €2 billion and is on course to potentially save €4 billion in 2020, and up to €12 billion by the end of 2022.

Last June, interest rates on the French debt went into the negative territory, similarly to the interest rates on German government bonds, as investors’ lack of confidence in the future of the global economy drove them to seek refuge in the safest assets.

On Twitter, France’s Public Finance Minister Gérald Darmanin welcomed this situation.

Euro-denominated debt is one of those sought-after assets, especially when issued by Germany, whose economy is still reassuring. It is also sought after when issued by France, which is an impressive first feat for the country.

Relief for indebted countries

Other European countries, some of which almost went bankrupt a few years ago, are also experiencing close-to-zero-interest rates. This means that investors receive nothing to hold their debt, even though they had been requesting loan sharking rates not so long ago, as a result of the financial crisis.

This is the case in Spain, Portugal and Ireland, for example, with Spain currently borrowing at almost 0%.

For France, although President Emmanuel Macron was set to reduce the public deficit, the ‘yellow vest’ crisis ended up widening the gap. Hence, the positive effects of negative and low-interest rates appear to be a blessing for France.

Commission’s forecast paves the way for new ECB stimulus

The European Commission kept its growth forecast unchanged at 1.2% on Wednesday (10 July) but revised downwards inflation to 1.3% for this year and the next, strengthening the case for further monetary stimulus as global economic risks worsen.

However, for the French Court of Auditors, such easily acquired money cannot make the country lose sight of its objective to reduce public debt. Debt’s structural problem cannot be solved by this cyclical bonus, according to the French auditing body.

“Less ambitious than the previous one, the April 2019 stability programme revised the targets for reducing the public deficit and debt downwards. Based on more realistic growth forecasts, they take into account the impact of additional measures to reduce tax revenues and tighten expenditure control,” the court of auditors wrote in late June.

“As a result, France’s public finance trajectory should deviate even further from that of most of its partners,” it said.

The temptation of more debt

The negative rates reflect a rather worrying macroeconomic situation for government revenues in general. The slowdown in economic growth already observed in Germany should catch up with France and reduce the amount of tax revenues, all while expenditure is barely falling.

The G7 “Finance Track”, which starts on 24 August in Biarritz will discuss these issues.

With growth expected to be somewhat sluggish in 2019 and 2020, some countries will be tempted to respond by taking on a little more debt, to use the fiscal stimulus tool.

Households could also be seduced to borrow more by very low-interest rates. In the absence of growth, this ‘race for debt’ is worrying.

France’s public finance minister stated that this would not lead to the country borrowing more. Such a statement should reassure the European Commission, which remains concerned by France’s debt levels.

Five takeaways from the EU’s economic recommendations to member states

While the public finances of all EU member states are now officially out of the “red zone”, the European Commission on Wednesday (5 June) still had tough economic policy recommendations for Spain, Italy, Belgium, Greece and Germany.

[Edited by Zoran Radosavljevic]

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