At a time when growing tensions are destabilizing the world economy, France must increase its defense spending against Russia and against global warming, Olivier Blanchard is alarmed. Professor at the Paris School of Economics and former chief economist of the International Monetary Fund (IMF), he also believes that the budget cuts of 10 billion euros announced by Bercy do not come at the right time and lack clarity .
You sounded the alarm about the public debt in November 2023, when American rates exceeded 5%. They have since come down. Is the worst behind us?
I was especially worried about the huge US primary deficit which, even if rates fall, will cause the public debt to swell. It is true that the United States has a huge advantage: its Treasury bonds are considered risk-free and popular with investors – so it can take on more debt than any other country.
But there is a limit. We can imagine a scenario where a Trump administration continues to widen deficits until investors wonder if there is not a risk. This would result in a series of small crises: bonds that struggle to find buyers, an increase in interest rates that scares Congress, efforts that prove insufficient to reassure the markets. Which could end up triggering a major crisis.
Europe is returning to budgetary rigor. Is it making the same mistake as in 2011, when austerity stifled the recovery?
Reducing the deficit too quickly when activity is slowing risks in fact accentuating the slowdown. However, growth forecasts for Europe have just been revised downwards. We must therefore be prepared to further support the economy, even if this implies a larger deficit for a while.
The problem is not the level of public debt – it does not matter whether it is 100% or 120% of gross domestic product (GDP) – but its stabilization. However, France has a primary deficit (not including interest payments) of around 3% of GDP. Stabilizing the public debt requires ultimately reducing this deficit to 0%, or even aiming for a surplus of 1%, to maintain room for maneuver in the event of a recession. You have to do it at the right speed, neither too fast nor too slow. In practice, achieving this requires defining a credible plan for adjustment and reduction in spending over five to eight years.
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