The debt strategy

Important decision are being taken at the HQ of the European Central Bank. Foto: Jay Eldy / Wikimedia Commons / CC-BY-SA 3.0

(Mathieu Rampin) – 150 billion in loans for members of the European Union. Thanks to the “SAFE” program set up by the European Commission, European countries will have access to a fund they can use to take out loans. This scheme is based on the rearmement promised by Ursula von der Leyen at the beginning of March. At the time, she had announced a 800 billion € plan. In addition to the 150 billion € from the “SAFE” fund, the member states now have the option of jointly exceeding the Stability and Growth Pact by 650 billion €. This allows Germany to envision a special fund of 500 billion € for the country’s military spending.

The Stability and Growth Pact should prohibit the member states from exceeding a public deficit of 3% of GDP (gross domestic product) per year, and a debt of 60% of GDP. The aim of this measure is to prevent the financial collapse of a European country. However, some countries, such as France, are not complying. According to INSEE, in 2024 the French government budget deficit will amount to 5.8% of the GDP, taking public debt to 113% of the GDP, or 3,300 billion euros.

France, the bad student – Although the French debt situation is annoying, it is not cause for concern for the French government. The main objective of the 2025 budget is to reduce the deficit. Since 2020 and the Covid crisis, the French government has chosen to support the country’s economy at all costs. It’s a choice that has paid off: France did very well with the crisis, industry is growing and foreign investment is on the increase.

The cost of Greece’s economic collapse after 2009 was that it lost the confidence of its creditors. Greece could no longer find investors because its public accounts had been revealed. When they discovered that Greece was over-indebted, nobody wanted to lend them money anymore. However, this is how countries finance their loans. To repay their first loan, governments take out new ones. This system can last as long as a country’s economic health is not in question, which is not the case for France.

This does not mean that we should not pay attention to debt. The ratings of the agencies that assess France’s creditworthiness have been falling for several years. One of these agencies, Standard and Poor’s, recently maintained its “AA-” rating for France while issuing a negative opinion. The government’s inability to agree on a budget is making investors nervous. The effect of this hesitation is the increase of the interest rates at which France borrows. They currently stand at around 3%.

War comes first – Debt allows states to invest in projects that are profitable in the long term: health, ecology or education. If the money is put to good use, the gains are maximized. The government’s objective is to create more money than it has borrowed. If a country invests in renewable energies, the money lent will be repaid with the sums collected from the sale of electricity. As for the 800 billion that the member states of the European Union will be able to borrow, this will mainly be used to rearm Europe and provide military aid to Ukraine. This spending will benefit the European military industry, which will produce the weapons. However, once the planes, tanks or other weapons have been supplied, they will no longer make any money for the country. In a few years’ time, when countries use other loans to finance today’s armaments, they will find themselves in a similar situation than France. In other words, they won’t be able to invest as much as they want in the things that matter. They will be stuck, while major issues such as climate change are growing.