Why France Is in Crisis

0:00Facebook knew the platform was causing harm. I want proof based on a true story. I respect our users. I lying to them. Enough! I'm not two years out of a dorm room anymore. The social reckoning written and directed by Aaron Sorkin, now playing in theaters, rated R. From the New York Times, I'm Vivian Yee, filling in his host. This is The Daily. The Daily. For weeks, thousands of high school students in France have been out in the streets protesting the conditions in public schools. Yesterday's protest drew in more than 250,000 people, since they began last month, more than 6,000 arrested. Some protesters said fires and clashed with riot police. Okay, okay. Several hundred teenagers have been injured, prompting authorities to suspend the use of stung grenades. One thing they want is for the government to spend more on schools.

1:00Some schools don't have chairs, some schools don't have tables, there are rats in the kitchens. A lot of schools they don't have enough teachers. Teachers are not here like my brother. He's had no class. But with the current state of French finances, that won't be easy. Because after years of overspending, France is in crisis and driving toward a physical cliff. Today, Times Paris Bureau Chief Mark Landler, on whether France's long struggle to find its generous welfare state, is finally reaching a breaking point. It's Friday, October 9. It's Friday, October 9. Mark Landler, Paris Bureau Chief, welcome back to the show. It's great to be here, Vivian. Mark, we know and you know from covering Europe for many years, that people protesting in France is not, shall we say, unusual? But tell us why this time is different.

2:01First of all, you're absolutely right. The French have a lot of muscle memory when it comes to protesting. This is a country in which protests are deeply ingrained in the culture. But I think a couple of things are different. One is the nature of the protesters. They're really young. These are high school students, 14 to 17 years old, who are usually tomorrow's protesters. But in France, they are now today's protesters. This is a movement that has started at high schools, outside of Paris initially, but spreading throughout the country. And so that's one thing that's different about it. What's also different is that these protests are occurring against a backdrop of multiple other crises in France. So in addition to these protests over the state of France's education system, you've got port workers who have barricaded ports over the rising price of oil. You have public sector workers who are striking over pay freezes.

3:03And you have an evolving financial and economic crisis in the country that all goes back to a very simple but very difficult reality for France, which is that this country can no longer afford its social welfare state. Right. So the mass just isn't adding up anymore. It sounds like. Yeah, that's right. And Mark, I think a lot of people know that France has a generous welfare state, but can you tell us specifically what is costing the government so much money? Well, France, like a lot of European countries, offers very generous entitlements. They offer medical care. They offer free schooling. They offer allowances to families. They offer a lot of paid leave for mothers, for example. But what really sets France apart is its pension system. France has one of the lowest retirement ages of any European country. It's currently just over 62 years. And that allows French people to begin drawing on their pensions sooner

4:06than almost any of their European neighbors. And that saddles the French state with an enormous additional burden, one that even generous social welfare states like Germany, for example, don't have. Yeah, all the benefits you were talking about sound pretty great. I mean, I know a lot of Americans would be totally jealous, but it also sounds pretty expensive. Yeah, and expensive is actually an understatement. So France has been living beyond its means for something like 20 years now. And as it has continued to increase its spending on social welfare, it has racked up some genuinely gargantuan debts. Its total public debt is now larger than the gross domestic product of the country. And the government is running budget deficits that are greater than 5% of its GDP. Those numbers are also wildly at odds with the limits that France is supposed to meet as a member

5:07of the European Union. The European Union is a currency union. And so when one country, particularly one as largest France and as central as France to the European project, is running unsustainable debts, it actually threatens the entire structure of the EU. And so France's problems are not just France's alone. They're also problems for its neighbors. And this is a situation that Emmanuel Macron came into office nearly 10 years ago, vowing to fix. He came in as a former economics minister, a former investment banker, and he promised to do two things. One, pass economic policies that rejuvenated the French economy, but also to be fiscally prudent to try to balance France's books. Right, and he's had almost a decade to follow through with this program. So what happened? Well, it's in a way a story of unfulfilled promise.

6:07So when Macron came into office in 2017, his promise was to try to reinvigorate the French economy, make France attractive again to investment, create an entrepreneurial culture, and so among the things he did is he very controversially removed attacks on wealthy people. He did labor market reform to try to make it easier for companies to lay off workers if they needed to. And then most importantly, he tried to tackle France's pension system, most notably by raising the retirement age from 62 to 64. Right, that pension reform fight in 2019 was killer for him. I mean, people were so angry. I remember all these photos of people taking to the streets, and it seemed like they were also really angry that at the same time as he was trying to cut benefits, he was also cutting taxes for the rich. Yeah, I think one of the problems that Macron had politically was that he became known as the president for the rich, and that's a label

7:13that was very hard for him to shake and also became very damaging when there was a cost of living crisis, and ordinary French people found their lives more difficult. But it is also worth noting that a couple of outside events in the world certainly got in his way, a war broke out in Ukraine, which had a huge effect on energy prices and on inflation more generally. He had to lead France through the COVID epidemic, which was very expensive for France, as it was for every other government. But he then was also thwarted by his own politics. Pension reform got bogged down, it prompted a huge amount of protest. In the end, the national assembly decided to freeze the raise in retirement age. And as his political situation deteriorated, and his party lost its majority in the French parliament, he basically kind of reverted to a

8:15muddling through strategy where he was merely throwing money at the problem. And that's really where we find ourselves now seven months before the end of his second term. So he's throwing a lot of money at the problem. I mean, that's quite the journey from when he was running on fiscal responsibility. It is indeed a huge journey, and it's not one that's ending smoothly, by the way, because even as he sort of heads into the final lap of his presidency, Macron is dealing with a couple other very expensive problems. One is the Iran war, which has again driven up the price of fuel and energy. And the other is the pressure that Donald Trump has put on the NATO alliance since he returned to the White House. Trump is demanding that European countries pay a much greater share of the defense burden. And so that is something that is, of course, also reflected in increased government spending for the French government.

9:15Right. And on top of all of that, because of the war in Iran, a lot of interest rates are staying high or even going higher, right? Which just piles on the pressure. Yeah. And that in turn has led to the latest crisis for the French, which is extreme volatility in the bond market. So bear with me for a second while I explain why this is important. Happy to bear with you, Mark. Bonds are a reflection of investors' confidence in the credit worthiness of a country. And the higher the yield, the higher the rate on a bond, the less faith investors have in a country's credit worthiness. What happened in France in the last week is that the yield on the 10-year French bond actually briefly went above 5%, which is commonly regarded as kind of the danger zone for bond market rates. And it makes it much more expensive for France to borrow money in the financial markets. The reason this happened was complicated. It wasn't just a single event.

10:20Investors were looking at both the debt problem and the deficit problems we've been talking about. They were also looking at these student protests and this prospect of spreading unrest around the country. And lastly, they were adjusting to the reality that a far-right candidate, Marine Le Pen, might plausibly be elected president of France next year. And it was really these interlocking developments that the bond market and investors found so troubling. So basically, all of it adds up to, like Macron is about to leave office and it seems like the country is in a way worse place than when he started. Well, I think sadly that there's some truth to that. I think Macron came in as a reformer hoping to really revitalize the French economy. He also came in as a centrist, a person who is going to govern pragmatically, almost in a postpartisan

11:21way. If you remember the way Barack Obama came into the White House in 2008 and president Macron would not like to hear this, but it's entirely possible that he leaves bequeathing France not only this very messy fiscal and financial picture, but also Emmanuel Macron may bequeath France its first postwar far-right government. We'll be right back. This podcast is supported by Netflix presenting the epic new film La Bolle Négre. Awards Watch proclaims at the best film of the year. Winner of the People's Choice Award at the Toronto International Film Festival and best director winner at the Cannes Film Festival. La Bolle Négre has been hailed as the great

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13:24speak with a pro to help guide you on your financial journey. Discover more ways to make the most of your money and get up to $1,000 when you open a brokerage account with a qualifying deposit today. Learn more at e-trade.com-slash-offer. Terms and other fees apply. Investing in involves risks. Morgan Stanley, Smith Barney LLC, member SIPC. E-Trade is a business of Morgan Stanley. Okay, so let's talk about Marie and the pen. A lot of people will know her as being the populist, anti-immigrant, anti-EU politician, but what's her approach to the economy? So as you said Vivian, Marie and the pen is a populist. So she actually embraces economic policies that favor entitlements and that favor a large state role in the economy. In fact, one of Le Pen's biggest promises going into this presidential election is to reduce France's retirement age from 64 back to 62. Okay, so back to the status quo before Macron tried to reform it.

14:24Indeed. Okay. And of course that's extremely expensive. It adds billions and billions of euros to France's pension burden. But what's sort of the great paradox here is that Marie and Le Pen is running as a disruptor. And yet in a funny way, she's a bigger defender of the social welfare status quo in France than almost any other candidate for president. And that's perhaps the great contradiction about the far right in France. Yeah, but maybe it shouldn't surprise us that a populist politician wants to prop up the social welfare benefits that people are used to. I mean, right now they're a huge protest in the street over underfunded schools. So she probably doesn't want to repeat of what Macron faced in 2019 and 2023 when these massive protests erupted over his pension reform plan. Yeah, that's a very valid observation. And it's probably why you haven't really heard any politician from the right left or center address these problems squarely and say

15:28that what France really needs is a period of painful fiscal belt tightening. And indeed, the other rising candidate in France is on the far left, a politician named Jean-Luc Mélenchon, who by the way, is actively embracing the student's cause. He offers a prescription for fixing France's debt problems that is every bit as unrealistic as Marine Le Pen's just in a different way. What Mélenchon wants to do is simply cancel a large chunk of France's debt. You can just cancel it? Well, you can't, of course. You can threaten to cancel it, but the moment you do that, you so chaos in the market, you cause a giant crisis at the heart of the European Union. Right. So really, it's not a credible remedy, but to a segment of France's angry voters, it probably sounds like the kind of medicine they'd like to have. So this is where France finds itself with a political establishment that is really not in any way

16:30facing up squarely to the problems that they need to deal with. Okay, so looking at the leading candidates in the French election, the odds of getting a more financially credible government after the election are pretty low, sounds like. And if you're an investor, you're worried that France is not going to be creditworthy at all. Yeah, that's right. And it leads you to some fairly dark paths. I think people in Europe, these days are recalling the Greek debt crisis, which happened in the late odds when the Greek government got itself into terrible trouble, mismanaged its budget, racked up debt, and eventually had to be bailed out by the European Central Bank and the International Monetary Fund. After years of very difficult and sometimes bitter negotiations between Athens and Brussels, a lot of other members of the EU, notably Germany, where I think German voters were

17:35very bitter at being asked to pick up the cost of Greece's free spending ways. Now just imagine that scenario unfolding with France, a much, much bigger economy at the center of the EU, and a country by the way that is going in the wrong direction, fiscally, the Greeks were only able to get these bailouts by agreeing to these very austere budgets with heavy-duty budget cuts. French politicians are actually proposing to spend more. So you can imagine the bitterness that might arise in other European countries if they now are on the hook for France's debts at a time when the French are actually talking about spending even more money. This could pose a genuine threat to European unity. But I do want to say at this point, just to be clear, we're in early days of this crisis.

18:39I think that things would have to get a good deal worse for us to be talking about a bailout by the European Central Bank, but the mere fact that this has begun to enter the conversation is already a pretty alarming indicator about the state of France's finances. And I guess the difference is that France is so much more economically important than Greece. Yeah, France is Europe's second largest economy. France is one of the original founders of the European Union. France is actually the only nuclear-armed state in the European Union. So for a whole variety of reasons, both economically and politically, France falling into financial distress is just of a completely different magnitude than Greece or honestly several of the other southern European countries that have skirted up against financial distress in the past. It sounds like for the rest of Europe, France is kind of too big to fail, but at the same time, I'm just thinking ahead to the presidential election next year. France may end up with a

19:42president, Marine Le Pen, who has made very clear that she opposes the EU. So how would that work if you have a French president who opposes the EU, but Europe is being asked to bail out France? Right. Well, Marine Le Pen used to favor France leaving the European Union. She shelved the idea of Frexit, which is what it was once known as a few years ago, but the fact of the matter is one of the areas where Marine Le Pen does see a major opportunity to cut spending is in France's contribution to the European Commission. So not only might the EU be on the hook for bailing out France, but they might also be getting less money from France. And for that reason, this poses yet another threat to kind of the harmony of the European project. Well, like you said, France is not Greece. It's a lot bigger. Saving it would put huge strain on the other EU countries. Might it be too big to save? Well, it's interesting. You could probably

20:45argue that both ways. You could argue that France is too big to fail because it's such a central player in the European Union, but you might also argue that it's too big to save because these pension obligations, particularly if the retirement age is lowered the way Marine Le Pen would like it to be, could make the bill here simply unsustainable. And at a time when a lot of these other European countries are dealing with their own economic problems, Germany isn't a much more parless situation now than it was in 2009, 2010 when it had to come to the aid of Greece. So these are countries that are dealing with political headwinds. They're dealing with their own rising populist parties and their own slow growing economies and worsening fiscal situations. So this is sort of precisely the wrong moment that you would ask European countries to anti-up, to bail out a country as big as France. Right. So is it just inevitable now that a bailout is what's going to happen because they don't

21:57really have other solutions, do they? Well, it's very hard to contemplate France not being bailed out if it ever came to that. The French are in the process of negotiating a new budget and they may get it through, but it's not clear that even if they did, it would solve their problem. And so for right now, their best option is to hope that eventually a solution will be found in Iran, that energy prices, oil and gas prices will come back to Earth, and that France will continue to be able to muddle through. That's an awfully slender read to hang everything on, but I think that's roughly where we are right now. Yeah, it strikes me, Mark, that a lot of what you're talking about here is familiar to the US. We also have a huge debt load. There are also investor worries about whether the US government is capable of ever getting to a place where we have less debt. So draw

22:57that out for me a little bit. Yeah, you're absolutely right. There are a lot of similarities, not least high rates on US treasuries. However, there's one big difference between the United States and France, and that is the US can keep printing money and can really expand its economy, its money supply out of these problems in a way that France as a member of the European monetary union can't do. So the US has a freedom of maneuver that France does not have, and that then leads you to these discussions of France being bailed out by its neighbors. Right. So is this the moment where France is finally going to reckon with the total tension between funding social welfare on the one hand and the lack of money to do it on the other hand? Is this kind of the end of the welfare system in France? Yes, that's the question I think everybody is asking. And I think the French instinct,

23:57as it has been for the last 20 years or so, will be to continue to muddle through. But remember, unless France gets some extremely lucky breaks, a quick end to the war in Ukraine and Iran, a sudden drop in the price of oil and gas. Yeah, they'd have to get very lucky. They'd have to get very lucky, they're not likely to. And as a result, I think they will have to confront these very, very difficult questions. So if you think about what's happening in France, the government is spending an extraordinary amount of money to fund the pensions of older people, depriving it of the resources to spend money on young people, on young families, on ordinary French workers. And so one of the questions that's also being asked this week is whether these student protests will expand to include people from many other sectors of the economy, hospital workers, transport workers, public sector workers.

24:58And that in turn would be far more disruptive to France than these protests already have been. What sets these protests apart, I think, is that they are about young people, they're about the future. And yet the future of these young people could be much darker because of the whole that France has put itself in. And I think ultimately that's why these protests have landed with such a thought in France this week. Mark, thank you so much. Thank you Vivian. We'll be right back. This podcast is supported by Netflix presenting the epic new film La Bola Negra.

26:00Awards Watch proclaims it the best film of the year. Winner of the People's Choice Award at the Toronto International Film Festival and best director winner at the Cannes Film Festival. La Bola Negra has been hailed as the great sweeping romance of the year, starring breakout actors Guitarica de la Fuente and Carlos Gonzalez with Panale Pichruz and Glenn Close. Indie Wire Raves. It's a work of staggering genius. La Bola Negra, only in theaters October 16th. Get tickets now. Why would I deceive you? There's no reason for me to do that. Okay, good chat. If you think you know everything about Elizabeth Holmes, think again. Come jump in with me. You're asking me to go? Yeah. Critics are calling you can see everything the year's best film and all-time mind-melter. I may think about this movie for the rest of my life. You're being real right now? You're always being real. You can see everything, Rated R, in Pierce, October 16th. Matching outfits, extravagant birthdays, many nicknames, a few classic moves of a dog-obsessed

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28:10protect Benjamin Netanyahu's right-wing government and to undermine the work of US diplomats. And... On Thursday, the aircraft carrier USS Abraham Lincoln returned to its home port of San Diego after a 322-day deployment marked by food shortages, mechanical problems, and mental health struggles for its crew. Family members of those aboard the ship, which deployed in support of the war in Iran, wept as the carrier arrived.

29:13Today's episode was produced by Shannon Lynn, Eric Kropke, and Anna Foley, with help from Alex Stern and Stella Tan. It was edited by Maria Byrne and Liz O'Baelin with help from Lisa Chow and Paige Cowell. Fact checked by Andrea Lopez Cruzado, contains music by Marianne Lozano, Dan Powell, Alicia Bae YouTube, and Pat McCusker, and was engineered by Chris Wood. Our theme music is by Wunderly. That's it for the Daily. I'm Vivian Yee. See you Sunday. Why do most running brands force your toes into tight, pony shoes? At Ultra, we think shoes should be shaped like actual feet. That's why our shoes have the ultra fit with room for your toes. Your toes engage for powerful strides, your feet are comfortable, and you get natural balance. Check out Altar running shoes at Altarrunning.com slash the daily, and use code Daily10 for 10% off your

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