La rentrée est chaude

An interesting chart from Costa Vayenas, author of The Swiss Franc, 1798–2055, tells us a lot about France’s economic history — and potentially its future.

For much of the last century, France had a relatively simple way of dealing with excessive debt and economic imbalances: inflation and currency depreciation. After both World Wars, inflation helped erode enormous public debt burdens. Not painless, but politically often more convenient than austerity and arguably less socially explosive.

The euro changed the rules. France can no longer independently devalue its currency or inflate away its debt. With public debt approaching 120% of GDP, limited room for additional borrowing, and further taxation or spending cuts becoming politically difficult, the options are narrowing.

The next political battleground may well be the ECB. Ahead of the 2027 presidential election, Marine Le Pen's Rassemblement National is already calling for ECB intervention to lower borrowing costs. On the other side of the political spectrum, Jean-Luc Mélenchon has proposed cancelling French public debt held by the Eurosystem. Different approaches, but the same destination: Frankfurt.

With tensions mounting in the streets of France, I expect the political shockwaves to travel rapidly to Matignon and ultimately Frankfurt. The independence of the ECB and the credibility of the euro could increasingly become part of the political debate.

Financial markets, particularly French sovereign bonds and the euro, are not remaining indifferent.