![Marine Le Pen](/https/www.telegraph.co.uk/content/dam/business/2024/06/28/TELEMMGLPICT000383146288_17195932865030_trans_NvBQzQNjv4BqgsaO8O78rhmZrDxTlQBjdGLvJF5WfpqnBZShRL_tOZw.jpeg?imwidth=680)
![Marine Le Pen](/https/www.telegraph.co.uk/content/dam/business/2024/06/28/TELEMMGLPICT000383146288_17195932865030_trans_NvBQzQNjv4BqgsaO8O78rhmZrDxTlQBjdGLvJF5WfpqnBZShRL_tOZw.jpeg?imwidth=680)
The “nein”, “non” or just a plain old “no way” has already been uttered. As France prepares for its most significant election in at least a decade, with its leading parties committed to increasing the government’s already lavish spending, Christian Lindner, the German finance minister, has made one point clear: France is not going to get a bailout, and certainly not from its close neighbours.
Germany can barely afford it and will be well aware that once they go down this road, it’ll be very difficult to change course. Subsidising French extravagance could lead to deep rifts in the eurozone. The only catch is that saying no will also prove very, very hard.
With the first round of voting on Sunday and the final round the following weekend, the centrist, pro-business leadership of President Emmanuel Macron looks poised for an epic defeat. Marine Le Pen’s National Rally (RN) is expected to win most seats and perhaps an overall majority, with the Left-wing New Popular Front forming the main opposition.
For all their differences, the two rivals agree on one fundamental point. Even though it already accounts for an extraordinary 58pc of GDP, they seem to believe the French government should spend a lot more money.
The RN wants to lower VAT on all energy products, reduce income tax for the under-30s and massively increase industrial subsidies. The Left wants to lower the retirement age – already one of the lowest in the developed world – and massively increase welfare benefits that are likewise very generous. To an even greater degree than the UK, France is an increasingly poor country that complacently assumes it is a rich one.
Where’s the money to come from? Not from Germany, as it turns out. Its finance minister Christian Lindner has made that clear.
“A tragedy could threaten the French,” he argued on Thursday, if the deficit is not brought under control, adding that intervention by the European Central Bank (ECB) would raise “economic and ... constitutional questions’’.
In other words, Germany is not about to let the central bank start printing money to keep French bond yields under control. That is significant. Until now, investors have assumed that France’s debts, now the third largest in the world after Japan and the US, both far larger economies, were backed by the ECB and by implication the rest of the eurozone. If that is no longer the case the paper is virtually worthless.
It is not hard to understand why Germany does not want to bail out its neighbour. For a start, can it afford to?
The German economy has been heavily damaged by losing cheap Russian gas. It has the lowest growth in the G7 and its exports to China face obliteration in an EU-led trade war. On Friday it was reported that retail sales plunged in the past month, while unemployment has risen more than forecast. The idea that there is a booming German industrial machine that can pay all the bills is at least a decade out of date.
The country faces a long hard slog to rebuild its economic model. While it will almost certainly be successful – this is Germany after all – it will need all the resources it can find for that task. The cash to finance French pensions isn’t there.
And once a bailout starts, it won’t stop. Under President Macron, France has already racked up huge amounts of extra debt. The ratio of debt to GDP has risen to 112pc and the deficit is already stuck above 5pc of GDP, which with a flat economy will rise further unless cuts are made.
France’s credit rating has been cut twice in the last few months. If France can simply increase borrowing, as both main parties now insist it should, that debt will simply rise and rise to who knows how high. Perhaps 140pc of GDP? Or 160pc? If you can get away with it, why not?
The problem for Germany is that it will be very hard to stop a bailout for two reasons.
First, Christine Lagarde, the president of the ECB, is French and an ally of Macron. The French president parachuted her into the job even though she is a lawyer by training and not an economist or banker, in part so that Paris would have a secure ally in Frankfurt. Lagarde may well emerge as the prime minister of a technocratic government in France, just as her predecessor Mario Draghi did in Italy. She is not the woman to pull the plug on the French debt market, even if Germany would like her to.
Second, the merest suggestion that the ECB won’t support France’s debts would create turmoil across the eurozone. The spread between German and French debt yields spiked up to its highest level since 2012 this week, and if the ECB signalled it was not willing to step into the market, French yields would soar, with Italian soon following suit. The Greek crisis of 2012 would be on replay, except this time not on the periphery, but right in the heart of the eurozone.
It is going to be a tough fight. The French electorate is clearly determined to keep on spending as wildly as it has done in the past. Under Macron a handful of superficial reforms convinced the markets and the rest of the eurozone that the country was putting its economy back in shape, and that, while spending might have increased in the short term, the debt would start to fall again soon. As he fades from power, that is no longer true.
The current German government, or the next one if Chancellor Olaf Scholz is removed from power, will face a very hard choice: bail France out, or risk turmoil within the eurozone’s financial system. Lindner has made it clear which path Germany will choose – and that means the next few years are set to be very rocky for the entire European economy.
Germany couldn’t afford to bail France out even if it wanted to
Berlin has made clear that it will not let the European Central Bank print money to save its neighbour