Will France need an IMF bailout?

All you wanted to know about French fiscal paralysis but were afraid to ask.

French policymakers have been discussing whether the country will be forced to go cap in hand to the International Monetary Fund if parliament continues to resist budget reforms and reduce its debt.

What would that mean in practical terms? And how likely is it?

Why is this happening now?

France’s public finances are in a mess. Paris hasn’t been able to cut its borrowing by much since the end of the pandemic, so the public debt burden is rising at an unsustainable rate. In addition to the cost of defense, digitization and the green transition, France is spending nearly 15 percent of its annual economic output on pensions — a share that is set to rise further as its population ages. 

So what could happen?

A government in financial difficulties will usually ask the IMF for a loan when financial markets refuse to lend to it because they don’t think they will ever be repaid. This generally happens after a government gets into too much debt by running big budget deficits (spending far more than it brings in). 

The IMF will lend to a country if it agrees to enact reforms that remove the causes of such deficits. Invariably, this requires politically painful concessions from the country asking for help, such as big tax increases or cuts to public spending.  That usually causes a recession in the short term, followed by a gradual recovery that ends with the country regaining access to the markets later on, which enables it to repay the IMF loan. 

Qu’est-ce que c’est, this “International Monetary Fund”?

The IMF is a lender of last resort for countries that need foreign currency (traditionally, dollars) to buy essential imports. It was set up after World War II to act as a safety net for the global financial system and is financially backed by the governments of all the world’s significant economic powers.

Has France ever borrowed from the IMF?

No. While the Fifth Republic (France’s constitutional setup since 1958) has had a number of financial scares — such as during President François Mitterrand’s attempted “clean break with capitalism” in the 1980s — it has always corrected its course before needing the IMF’s help (unlike the U.K., for example, which requested emergency support in 1976).

Why are France’s finances unsustainable? 

Public spending has to be paid for by taxes. France already has the highest tax burden in the developed world, at nearly 44 percent of gross domestic product in 2023.  But spending has consistently outpaced tax revenue for 50 years: The government last ran a surplus in 1974. By 2030, the IMF (which keeps an eye on these things constantly) reckons French public debt will be 130 percent of GDP, double what it was before the financial crisis in 2008. 

But France has managed so far, hasn’t it? 

Well yes, but for most of the last decade, it’s been very cheap to borrow. Interest rates have gone up all over the world since 2022 and they show no sign of returning to their old low levels. In 2020, France paid less than €30 billion in interest on its debts. By the end of the decade, most forecasts suggest it will have to pay €100 billion a year. That’s money that can’t be spent on essential public services, from health to defense.

So will France have to borrow from the IMF? 

Almost certainly not. France is quite capable of borrowing from financial markets now, even though borrowing rates have risen a lot. And even if that should change, the IMF would not be the first line of defense. That would be the European Stability Mechanism, which was set up during the eurozone sovereign debt crisis to oversee any bailouts that might be needed in Europe.  

What about the European Central Bank? Can’t it help?

The ECB could indeed lend effectively unlimited amounts of euros to France in a crisis, but only under the framework of a structural reform plan agreed with the ESM. That would need the approval of the European Commission and the eurozone’s other national governments. It would amount to surrendering control of its economy — at least temporarily — to its European partners, as Greece and others were forced to do. 

Wasn’t the IMF involved with those bailouts though? 

Yes. And France, as a member of the IMF, would always have the right to ask for help from it. But if it ever lost market access, France’s chief need would be for euros, not dollars, which is why it would be more likely to pursue a European solution. The IMF’s involvement in the eurozone bailouts was largely accidental, not least because the EU treaty didn’t provide for that kind of financial emergency (quite the reverse, actually: It actively prohibited bailouts). The ESM and ECB between them now have a framework that ought, logically, to ensure that neither France nor any other eurozone member needs the IMF as a lender of last resort.