00:21:41 · Jeff Guo, Erika Beras, Thomas Philippon
[00:21:41] S2: Oh, that's bad karma. Thomas says if you just look at the financial situation in France right now, it's not that that bad. What the investors are really worried about has less to do with economics and more to do with politics. They are starting to think that maybe the French government is just incapable of doing what it takes of raising taxes or cutting spending. [00:22:03] S1: The rise of the far left on one side and the far right on the other, neither of whom have realistic plans for balancing the budget, has made investors think twice about lending France money. [00:22:13] S2: And there is a key indicator here, this number that everyone looks at. It is the difference between the interest rate that France has to pay versus the interest rate that Germany has to pay, because everyone thinks Germans will always pay their debts. This is called the spread, and it's basically a fear index. It measures how much investors fear that France might not pay back its debts. [00:22:34] S1: And that fear index, shall we call it, it started to go up in 2024 just when president Emmanuel Macron, who was seen as his economically responsible, balanced budget type, started to lose control. Since then, the spread or this fear index has remained elevated. And then in late September, that's when the fear index spiked. It was as the protests were getting underway. [00:22:57] S6: The problem is the politics is completely messed up. And it was already pretty messed up before the recent protest. The recent protest has highlighted how messed up it is.
00:22:57 · Thomas Philippon, Jeff Guo, Olivier Blanchard, Erika Beras
[00:22:57] S6: The problem is the politics is completely messed up. And it was already pretty messed up before the recent protest. The recent protest has highlighted how messed up it is. [00:23:07] S2: And Thomas says it's not the protesters' fault. [00:23:11] S6: Many of the things that peep... The protesters are asking for are 100% legitimate. Like, you should have good condition to study. That's a real problem. [00:23:22] S2: But the more messed up France's politics looks, the higher interest rates they might have to pay, and that raises a scary possibility. A possibility that Olivier Blanchard has been studying in the years since he made that big speech about how sometimes having a lot of debt isn't so catastrophic. Catastrophic. Recently, he's been looking at when and how debt does become catastrophic. [00:23:43] S5: You have this... Is what I call the danger zone. Where it is exactly, we don't know. But I suspect that in the case of France, we are there. [00:23:53] S1: Olivier says once you're in this danger zone where investors have started to lose faith in your government, the situation could spiral out of control. [00:24:01] S2: Yeah. You see, these higher interest rates that worried investors are demanding, they are gonna make it even harder for France to pay off its debt. So France's financial trajectory starts to look worse. It's got this bigger hole to dig out of, and that gets investors even more worried. So they're gonna force France to pay even higher interest rates. [00:24:21] S1: It's like your classic bank run except on a national scale.
00:24:21 · Erika Beras, Olivier Blanchard, Jeff Guo
[00:24:21] S1: It's like your classic bank run except on a national scale. [00:24:25] S5: When it happens exactly, when, you know, when things go from bad to worse, very difficult to predict because it depends on the mood of investors. [00:24:34] S2: That's scary. It's very scary that you're saying that. Right? [00:24:37] S5: No. Please. Please. Please. Don't sell your French bonds. Keep them. Keep them. Keep them. [00:24:42] S2: Yeah. Olivier really wanted us to be careful about what we said here because in this situation, perceptions are really important. [00:24:51] S1: He was actually planning on publishing an editorial about this disaster scenario in a big French newspaper because he wanted to warn the people. He wanted the people of France to take this debt problem seriously. But then he stopped himself. He was like, what if my little op ed is the thing that spooks the markets and triggers this whole doom loop thing? [00:25:11] S5: If I write in Le Monde that this could happen and this is how it could happen and the steps, it would give more concreteness to an idea that people have not perceived. Now what you want to do is convince people but not scare investors. Right? [00:25:31] S2: Olivier and Thomas both say it's pretty clear that France has gotta do something. Now one possibility is that France's leaders could just suddenly decide, hey. We are gonna be fiscally responsible now. We're gonna cut spending, balance the budget. But, given the political winds right now, yeah, that's probably not gonna happen.
00:25:31 · Jeff Guo, Erika Beras, Thomas Philippon
[00:25:31] S2: Olivier and Thomas both say it's pretty clear that France has gotta do something. Now one possibility is that France's leaders could just suddenly decide, hey. We are gonna be fiscally responsible now. We're gonna cut spending, balance the budget. But, given the political winds right now, yeah, that's probably not gonna happen. [00:25:49] S1: Another possibility is that if things start to get much worse, the European Central Bank could come to the rescue. After the financial crisis, the European Central Bank created measures to prevent countries from spiraling into that doom loop that Olivier was talking about. There's also a European rescue fund that could offer emergency loans, though it's never had to bail out a country this big. And that money would almost certainly come with strings attached, like France would probably be forced to tighten its budget. It wouldn't be able to keep spending like it used to. [00:26:21] S2: Thomas says from his point of view, France either starts fixing its debt problem now or it lets the problem get worse. And then it maybe becomes an emergency, and France might have to make sudden harsh cuts to the budget. [00:26:34] S6: Now the thing is if you don't... If you do it stupidly and you have to do it very fast, you may end up cutting spending more than you would have to, and you're gonna hurt more people, in particular, people who are more vulnerable. So that I find painful because that's unnecessary and and unfair. [00:26:49] S2: And as an American, not not to make this all about The US, but [00:26:53] S1: That's what we do.
00:26:53 · Erika Beras, Jeff Guo
[00:26:53] S1: That's what we do. [00:26:54] S2: I think that the unnerving thing about what we're seeing in France is that what's happening there rhymes with a lot of what's been happening here in Washington. You think the French government has a lot of debt? The US government has more debt. You think France is running huge budget deficits every year? We are running even bigger deficits. You think French politics is dysfunctional. I mean, look around. Of course, The US is different from France in some key ways. For one, we control our currency. The dollar still has enormous international cachet. Also, The US economy is growing faster than in France. But the most important thing that The US still has right now is credibility. Somehow, people still think that despite all our government borrowing, all our deficit spending, all our political dysfunction, that The US is gonna turn it around someday, eventually. [00:27:51] S1: Save the dates, November 6 through the eighth. Planet Money is doing three live shows at Kilkenomics, the comedy and economics festival in Ireland. Kilkenny, the town, gets taken over by comedians and economists and will be there pretending to be one or the other. Find tickets at the link in the show notes or at .com. [00:28:12] S2: This episode of Planet Money was produced by Sam Yellowhorse Kesler and edited by Marianne McCune, is fact checked by Charlotte Isidore and Sierra Juarez. Jimmy Keeley and Travis Hagan engineered the show. Alex Goldmark is the executive producer of Planet Money. [00:28:25] S1: I'm Erika Beras.
00:28:25 · Erika Beras, Jeff Guo, S7, S0
[00:28:25] S1: I'm Erika Beras. [00:28:26] S2: And I'm Jeff Guo. This is NPR. Thanks for listening. [00:28:35] S7: Stay tuned for the following announcements and messages from our sponsors. This message comes from Google Workspace with Gemini, one subscription that does it all. Personalized AI in premium business versions of Gmail, Google Docs, Drive, and more. Try it free for fourteen days at goo.gle/workspacewith Gemini. [00:28:57] S0: This message comes from NPR sponsor Charles Schwab. Financial decisions can be tricky. Your biases can lead you astray. Financial Decoder, an original podcast from Charles Schwab, can help. Download the latest episode and subscribe at schwab.com/financialdecoder.