The French Political Crisis That's Turning Into a Debt Crisis

The new European debt worry

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1:47Bloomberg Audio Studios. Podcasts. Radio. News. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Allaway. Tracy, I don't know about you, but I don't think we need another Euro crisis right now. Like, we have a lot going on on our plate these days. There's a bunch of stuff to be anxious about. A lot of moving things.

2:22The last thing we need is to be talking about European bond spreads yet again. And yet. And yet, here we are. Well, we have no choice, right? It's right there. Well, the other thing I was thinking, so the first Eurozone crisis was sort of, I guess, 2011 to 2015, 2016. I can't decide if that feels like it was ages ago or just yesterday. I would go with ages ago. I mean, there's so much that's happened since then. And it all seems like, not only does it seem like a long time ago, sort of in clock time and how much has happened.

2:54It seems a little quaint. Quaint. In the sense of, like, okay, there was these spreads and grease, et cetera, then it was kind of solvable. Margot Draghi came out and said whatever it takes and that they were there to close spreads and stuff. And then it more or less went away. There were some referendums and stuff like that. But, like, it was a tractable problem and they did ultimately fix it compared to some of the big sort of seismic questions that we seem to be dealing with today. It got fixed. And if you look at Greek bond yields now, which were, you know, the epicenter of the original Eurozone crisis, I mean, they've recovered enormously.

3:31And now the key difference, this is a sort of classic history, doesn't repeat, but maybe it does rhyme thing. The country or the Eurozone member that everyone is worried about now is one that was viewed as relatively strong just 15 years ago. And that is France. French bonds, no longer the GOAT. Did you get that? Oh, come on. GOAT. Like OAT? G-O-A-T. Yeah, that's good. Like OAT. Okay, let me do something easier. French bond yields are OAT of control. There we go. Oh, that's a good one. That I definitely get.

4:02The good thing about it being France is that you have a lot more opportunities to make puns. That's right. We should have plenty of opportunities. I used to speak French, by the way, and then I forgot it. The first Euro crisis was, it was about peripheral Europe. And so Greece was sort of seen as the worst, but, you know, Cyprus also had a very rough time, and Italy and Spain, et cetera. Portugal had some dicey moments, et cetera. This is, like, much different. And as you're right, like, the country that everyone is homed in on is France right now.

4:33Core Europe, always perceived during the first Euro crisis a little bit weaker than Germany, which is core core. But still, like, by and large, one of the relatively safer ones. And it's also not as straightforwardly about debt, right? There are debt concerns. There are deficit concerns. But also, like, there are some, like, deep political concerns, and we're going to talk about that. But I think a big, just simple part of the story is when people look at the election that's coming up in 2027, they do not see much prospect for, like, a sort of, like, centrist, Macron-esque type of candidate.

5:08And I think they're worried about, like, who's going to be running the country in a few months. This is always my question when it comes to debt crises, because often you see that the fiscal fundamentals, they're kind of the same for ages and ages and ages. I don't think France has run a budget surplus for the entirety of our lives, right? Probably not. Like, this has been the French debt story for ages. So I'm always very curious what the actual catalyst is for people to start getting worried about these things and for yields to actually start shooting up. Totally. Well, anyway, even though we would probably, we do not need another euro crisis right now, we have no choice.

5:44We have to talk about what's going on. And we really do have the perfect guest. We're going to be speaking with Shaheen Vallee. He's a senior fellow at the German Council on Foreign Relations. He's an advisor to institutional investors. He once was an advisor to Macron when he was an economy minister. This was in 2014, 2015. Even advised him on his campaign for a while in 2016 before parting ways, before the actual vote in 2017. So someone who really, like I said, the perfect guest. So Shaheen, thank you so much for coming on the podcast.

6:16Thank you for your invitation. Why don't you give us a little bit of background?

Macron and the Greek crisis

6:20Tell us about the time when you were an advisor to current president Emmanuel Macron. What capacity was that? What role was he in at that time? What were you doing for him? So I first met Macron in 2012. I had just joined the cabinet of Hermann von Rompuy, the president of the European Council, who I was advising. And Macron was my counterpart because he was advising President Hollande at the time. And so we've spent a good two years, the second mandate of President von Rompuy,

6:51working very closely on a lot of actually Euro crisis issues from Cyprus to Greece and others. And so when he was appointed minister in the fall of 2014, which also coincided with the end of the mandate of von Rompuy, I joined him in Paris, in Bercy. And I worked with him primarily on European issues, on European economic issues. And the Greek crisis at the time was still in the background.

7:22This was just a few months before Syriza and Greece got to power. And I actually knew Varoufakis from a previous life and actually introduced Emmanuel Macron and Varoufakis. They actually got along very well. And Macron, I think, did as much as he could to try and help Greece during this pretty pivotal moment. I think he was one of the few French politicians who really understood what was going on and who tried as much as he could to help. But I think the situation in Greece got out of hands and then the rest is history.

7:54But I think it's interesting to be reminded of Greece today because I think some of the debates that I see emerging in France really remind me of these moments. In particular, I think some of the arguments that are being made by La France Insoumise, for instance, around, you know, what can we or cannot do with France's debt really remind me of some of the arguments that Varoufakis was making at the time. And that he sort of, you know, went head first in a confrontation with the Eurogroup first and then with the ECB, which ended pretty badly.

8:28And I worry that people from La France Insoumise have not learned that lesson and may be heading for the same confrontation. I doubt Jean-Luc Mélenchon will be the next president. So we may be spared that confrontation. But I think it still lingers in the background. And maybe when we talk about politics, I'll say more about this. But I think that's an important setup to be reminded of. So we're definitely going to talk about all of that. But why don't we talk about, I guess, the proximate cause of the latest concern?

9:00And I decided to fact check what I said in the intro about when France last had a budget surplus. So France hasn't had a budget surplus for more than 50 years at this point. So our entire lifetime. Why are people worried about French debt now?

Political risk and French bonds

9:16I think they're worried about French debt, not because there is anything new about fiscal policy. You know, the budget that was announced is pretty much in line with expectation. In fact, it's probably a touch better than what was expected. I think what has changed in the last few weeks is the perception of the political risk. And I think for two reasons. The first is that I think people have repriced the odds of a centrist candidate getting to the second round. I think for a long time, people assumed that essentially the runoff would be between Marine Le Pen on one end and on the other, some sort of centrist candidate emerging.

9:53You know, it was not clear who, but, you know, Edouard Philippe was probably the best position centrist candidate. And I think what we've seen since the summer is, you know, these centrist candidates, pretty much all of them, not only dropping in the polls in the first round, but also, and I think that's probably the more worrying thing, also pretty much now all of them losing in the second round against Le Pen. So I think that's the first change. And as a result, what has emerged as the most likely runoff is a runoff between Marine Le Pen on one hand and Jean-Luc Mélenchon on the other.

10:26And, you know, one could think that, you know, you know, the polls are so clear about the fact that Marine Le Pen is going to win that, you know, it wouldn't, it's going to win if she is in a runoff versus Mélenchon, I mean, that it shouldn't matter so much. And I think here there's been really something really new in the last few weeks, which is the realization that we're not only looking at a presidential election, we're looking at a presidential election and a month after at a general election.

10:57The general election hasn't been called yet, we don't have a date, the next president will likely dissolve the current parliament and call for a new election in order to be able to govern with a new majority. And I think what is emerging now, which I think was not in the picture of most people's mind, is the fact that Marine Le Pen, who was thought to be able to govern with a center-right majority if she needed to, is probably going to face a very difficult general election. So she might well win the presidential election, but she could struggle to actually have a majority in the general election, especially if she's facing a strong far-left opponent like Mélenchon is.

11:39And so I think for the first time we have seen emerge, the risk that France post these elections in 2027 is actually in a worse place now insofar as being able to decide about fiscal policy than it is today. We're already in a pretty bad place since the elections in 2024, where Macron doesn't have a majority in parliament and therefore has created doubts about passing every budget since. And I think markets were giving the benefit of the doubt to France, assuming that by 2027 we would have a president and a parliament being able to pass a credible fiscal adjustment.

12:19And I think we're waking up to the fact that we may not have that. And I think that, you know, what most people expected and most people who thought Le Pen could win expected, which is that we would get, that we would end up with a government that would be in spirit quite similar to the government we've had in Italy since the arrival of Meloni. It would be essentially a center right to the far-right government that has to be fairly pro-European and has to be fairly compliant with European fiscal rules.

12:51I think that scenario of a Meloni-like transition is slowly being depriced. And I think it's right because I think there are a few reasons why France is not Italy. And I think it's important to unpack that. I think the one thing that is true across Europe is that most of these far-right political parties have indeed stopped being fundamentally anti-European. I think, in fact, they're actually organized around European positions, sometimes more than the mainstream parties.

13:22They have a different European agenda. They want a white and Christian Europe for the most part. But they have stopped fighting against the Euro, fighting against the EU. But, you know, in France, Le Pen would be in a different position than Meloni because France is a net contributor to the EU budget. And so Le Pen could pick up a fight with the EU on the EU budget, which is actually being negotiated now in a way that I don't think Meloni was in a position to when she arrived in power because, you know, Italy was the net recipient of 300 billion of new funds from the recovery and resilience facility.

13:57So I think there are several reasons why France and France led by Le Pen could have a much more antagonistic attitude towards the EU and much more difficulty in putting together a coalition than Meloni had.

14:27There are some market stories where you want every detail. Tracy and I have made quite a few podcasts on that basis, but sometimes you've only got 10 minutes and need to know what's moving markets and why. That's the Barclays Brief podcast. Every week, experts from Barclays markets and research get you up to speed on what matters and what to watch next. About the time it takes to grab a coffee. So search Barclays Brief wherever you get your podcasts. Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done.

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The shift in European politics

17:41You know, if we went back 10 or 15 or I guess like 25 years ago when Le Pen's father and the thought that like he would make the runoff, et cetera, was just like such a shock to all of Europe. I forget who he was running against in 2001 or two. Against Chirac in 2002. And that was like such a shock. And now, as you describe it, it's like, okay, like the markets are sort of cool and it's like I'm with the idea of like Le Pen's coming in and I was unclear whether it's just has the Overton window shifted?

18:16Has the quote far right shifted? But what I'm curious about like, okay, across the West we've seen the collapse of like centrist or center parties or center. Is there anything distinct about France why the floor has fallen out for the center or is it just the exact same thing that we've seen basically everywhere in the Western world? Whatever that malaise is, that there's just no appetite for sort of centrist anymore. No, I don't think France is unique. I think, you know, I think I've said before that Emmanuel Macron would sadly be our Renzi in Italy, kind of the last, you know, force of the center who's trying to hold the center together and who eventually fails to do so.

19:00And so very much like Renzi, he's leaving the center. And by that, I mean both the center left and the center right in complete, in complete disarray. You know, the Socialist Party had its primary this past weekend and only 120,000 voted in this primary. In the last presidential election, it was more than a million. So, you know, so I think that that says something about the loss of energy, the loss of appetite. And in fact, the real polarization of, you know, I think politics in most Western countries, but, you know, politics in France in particular,

19:37where you actually have now two clear contenders, Le Pen and Mélenchon, coming from, you know, the opposite sides of the political spectrum and pretty much nothing of relevance in the middle. Can you characterize Le Pen's, I guess, fiscal attitude or fiscal stance?

Le Pen and fiscal policy

19:54Because I see these headlines that, you know, she wants more public spending cuts. But then I also see headlines that are like, oh, and also we're going to reduce the pension age again, which I always thought was, you know, one of the sources of fiscal weakness in France. It's a very important question and a very difficult one, because there has been different views expressed by the Rassemblement National on its fiscal policy. I think there's been a turn that was initiated by Jordan Bardella, which was to basically make the party or the political line a lot more fiscally orthodox.

20:28And he, you know, came up with, you know, the possibility of moving the pension age higher. And he kind of gave, I think, all the signals to French businesses and to markets that he could be compatible with a traditional sort of center-right neoliberal economic policy. Le Pen comes from a place where she, I think, is more committed to social spending. She's more committed to, you know, protecting pensioners. And so I think she hasn't quite made that U-turn. What's very interesting, however, is that last week on October 6th, she presented a new and very bold fiscal rule that she would want to introduce in the French Constitution by way of a referendum.

21:13And that fiscal rule basically mandates a very significant fiscal adjustment. So she wants to bring the deficit back to the debt-stabilizing deficit. So that's roughly cutting the deficit in half almost immediately. And so long as France is not reaching that debt-stabilizing deficit, she wants to have a minimum of 0.5% of GDP of fiscal adjustment. So which is roughly in line with what the European fiscal rules mandate. But the portion that she's introducing is that this would continue basically so long as debt-to-GDP has not converged back to 60%.

21:49So on paper, it's a very strict fiscal adjustment. The governance of it is also extraordinarily tight in the sense that no budget that doesn't meet this rule can be passed. Otherwise, it has to be blocked by the Constitutional Court. And a majority of three-fifths of Parliament needs to approve a budget that would not respect that rule in the case of an emergency, a recession, a war, an energy crisis. And that can only be done for two years. Otherwise, it has to be approved by referendum.

22:21So she's setting the bar in terms of fiscal orthodoxy even higher than the German debt-break is setting it. So I think she's understood that it was very important to signal something strong on fiscal policy. Where I see a bit of cognitive dissonance is that she's saying that. And on the other hand, she hasn't really put the policies that would deliver that kind of fiscal adjustment. So she hasn't said anything substantial on the pension reform, for instance. And so you have a weird situation where she's saying something very bold and, in my view, almost too bold to be credible on the fiscal front.

23:00And she's not backing that with concrete steps to deliver on these promises. And so I don't think that tension is going to be able to survive. At some point, she's going to have to disappoint someone. Either she will have to disappoint markets by saying, actually, what I committed to fiscally, I can't deliver. Or she'll have to disappoint her electorate by actually saying, well, my commitment to fiscal orthodoxy means we have to put the pension age back to 65 or plus, for instance.

23:31I think that internal discussion inside the Assemblée nationale hasn't been settled. It may be settled during the campaign if fiscal policy becomes a big part of the discussion. And it might. And I think the stress in financial markets might help to propel fiscal discussions at the heart of this campaign. It's striking that even though we're at quite stress levels in the French spread, fiscal policy hasn't been really at the heart of the policy debate so far. I think it will come.

24:03But so far, it's been rather timid. And what's interesting is the recomposition that we're seeing around these fiscal issues. Essentially, the center-right all the way to the far-right has basically all embraced some version of a constitutional debt rule. They each have, you know, different parameters and different preferences, but more or less, they're all agreeing on that. The left, the Socialist Party, and the Greens haven't said anything about this. And la France insoumise has been very explicitly against it.

24:36And so you have a debate that is going to be polarized around the fiscal issue. And what is not clear to me yet is whether that polarization around fiscal issues is not going to actually help la France insoumise. In the sense that today, Mélenchon is out saying very strongly that he's opposed to Le Pen's fiscal rule, that he's the one who is prepared to stand up to markets, that he's the one, you know, fighting the governor of the Banque de France or the ECB president around what they're saying around the French fiscal situation.

25:12So it could be that, you know, and this is why I was referring to Varoufakis earlier, it could be that, you know, Mélenchon becomes our Varoufakis and that he gets some political credit for it. What do you mean by that? And tell us a little bit more about Mélenchon, some of the economic things he said. I think he's talked about, like, canceling French debt. Didn't he also have, like, he went after the French central banker, etc. Talk to us a little bit more about those Varoufakis parallels and some of what he said and then maybe the gap between what he said and what might be realistic.

Melenchon and debt monetization

25:48The Varoufakis parallel is to illustrate the fact that Varoufakis actually had a lot of political support in Greece and, in fact, won the referendum that he called for, which was opposing the fiscal adjustment program. And yet he was not able to deliver on the fact that he had won that referendum. And so, you know, I see a strong parallel with what Mélenchon is proposing today, which may get a lot of support, but which I don't think will be very realistic. For instance, you know, Mélenchon is still campaigning, although a bit more quietly these days, on, you know, bringing back the pension age to 60 years old.

26:26But what I think he's made most headlines for in the last few weeks is his idea that, you know, yes, the French debt is very high. But in fact, a large portion of that debt, about 20 percent of it, is owed to the French central bank because the ECB, you know, intervened during both the euro crisis, but also after during the COVID crisis. And as a result, this debt that we owe to ourselves, we could cancel it.

27:00So he used a few different expressions, which I think betray very interesting debates that are taking place inside La France Insoumise, but more broadly in economic circles around what is possible with debt monetization and what is not. The first expression he used, what was, you know, the debt that we have at the Banque de France, I will, you know, throw it to the fire. I will basically cancel it. And then he used another expression, which was betraying some internal discussions they were having and some changes where he said, you know, instead of throwing it to the fire, he said, I'll put it in the freezer.

27:33And by that, he meant instead of canceling it, what we could do essentially is ask the ECB to roll this debt in perpetuity. So instead of, you know, eventually this debt maturing and the French government having to roll it and issue that in the bond market, we could basically ask the ECB, in this case, the Banque de France, to roll this ad infinitum. And it's true that if we did that, you know, that would reduce at the margin the cost of financing France's debt.

28:06So he's, you know, put this on the table, I think deliberately to be provocative, not realizing, I think, that this would excite even more market concerns around debt sustainability. And then he became very upset when the central bankers, and in particular, the governor, the new governor, Emmanuel Moulin, suggested that this was not really possible. You know, that would be a violation of European treaties. And Moulin had a quote in the Financial Times where he said, I'm worried that France would be strangled by its debt if it doesn't take action to adjust fiscally.

28:42And Mélenchon was furious that the governor dared, making a reference about France being strangled by the markets and thought this was an act of betrayal. And he actually threatened in a tweet, he threatened the governor of a trial for high treason. And so, you know, things got pretty agitated and heated. But I think they exposed the fact that I think Mélenchon's line is that he's the force that is going to stand to the dark forces of markets. And I think this is where, you know, we may have a problem because if, which I think is actually likely, Mélenchon is in the second round.

29:20And if Mélenchon, which I think is very likely to, does very well in the legislative election, we could end up in a situation where Le Pen has won the presidential election. But the parliament, very much like it was after the snap election in 2024, is dominated by the left in general, but the left itself being dominated by Mélenchon, we could be in a pretty ungovernable situation, or at least a situation that requires some kind of compromise between the far left and the far right.

29:52And given what I've said earlier, it's really hard to see how that compromise emerges without a much more adult discussion around fiscal policy, which I think we've failed to have in France for quite a while. Maybe this is a good point to ask about the French bank.

The state of French banks

30:10So in Eurozone crisis, 1.0, and I'm hoping no more numbers come after that. But in the original Eurozone crisis, one of the worries was we got this sovereign bank doom loop, basically. So, you know, government bonds would sell off. European banks held a lot of those European government bonds, and then they would take losses. And then weakened banks wouldn't be able to lend. And then eventually, you know, maybe those banks would have to get bailed out by a sovereign, which was already having budgetary pressures of its own.

30:44What's the case or what is the current state of French banks? Because I see, you know, I get a lot of random analyst notes. I have a lot of French banking analysts who are currently sending things saying French banks are well capitalized. I also saw something interesting, which is that spreads on French bank debt were actually tighter than spreads on the sovereign recently, which is something that you don't see every day. How can we categorize the French banks here? So, the French banks, in comparison, say, to Italian banks or to Spanish banks, have relatively little government debt.

31:20So, you know, if they were to increase their government debt exposure, they could do that pretty meaningfully, you know, and still stay within the bounds of what Italian or Spanish banks do. They have a bit less debt than they did during the euro crisis, at the peak of the euro crisis, but not so few compared to that. So, essentially, French debt could increase their exposure to stabilize a bit the market and basically reach the peak that they reached in 2011, 2012.

31:53And if they wanted to, you know, go very far and, you know, go as much as the Italian banks, they would have a lot of space, you know, as much as, you know, three to four hundred billion of space to do that. So, I don't think we're in a situation where there is a very active doom loop between the French OAT exposure and the French banks. If you remember, you know, what you said about the euro crisis in 2020, 2011, the moment where there was an acute stress in the French banking system, which actually was, I think, a very critical moment in the summer of 2011,

32:27where the crisis stopped being a crisis of the periphery and really became a crisis of the core of Europe. And I think it is, you know, in large part why Mario Draghi in the summer of 2012 did his famous announcement is because the crisis was moving from the periphery to the core. But it was not so much because of the doom loop at the time in the strict sense. It was because the French had a lot of liabilities and dollars. And in the summer of 2011, essentially, the U.S. money market mutual funds stopped financing the European banking system and, in particular, the French banking system.

33:05So, basically, what really created the crunch on the French banks in the summer of 2011 was the scramble for dollars. We're not in that situation today. And so I'm less worried about a sovereign bank doom loop now than I would have been, you know, 10, 15 years ago. We're not in that situation today.

33:54It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com by selecting Work Mode, available on Plus and Pro plans. Running a business means you're always on the move.

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37:13you can earn four times points on all your travel with the flagship Premier Card. Visit NavyFederal.org slash Flagship Premier to find out more. Navy Federal is insured by NCUA. Terms and conditions apply for rewards. Can you explain maybe to our listeners who like, maybe they're young, they don't remember 2011, 2012, and so forth. Can you explain why in the current environment, it's not as easy for the ECB to sort of put a cap on spreads the way it might have been in Draghi's time?

37:48All they have to do is say whatever it takes, right? Those are the magic words. Yeah, why can't they do that this time?

The limits of ECB intervention

37:53Just say it.

The limits of ECB intervention

37:54No, it's a very important question because, in fact, we ended the Euro crisis with effectively, without really saying it, a new architecture for the Euro area. You know, we essentially departed from the architecture that was written in the Maastricht Treaty to a new architecture that emerged because a few things were added to the Euro of the Maastricht Treaty. And these few things were essentially a backstop that allowed to lend to governments.

38:26You remember when the Euro crisis started, there were a lot of people who said it's actually a violation of the treaty to provide financial assistance to another Euro area member state. So we created first the EFSF, the EFSM, and then the ESM, which actually was kind of a, you can view it as a European version of the IMF, which is basically allowed to lend to countries against an adjustment program. We completed the Euro area with what we call the banking union. So essentially a single supervisor for banks and, in principle, a single resolution authority

39:02precisely to break the doom loop that Tracy referred to between banks and sovereign. And finally, and maybe most importantly, we accepted, without really saying it in so many words, but we accepted that the central bank could be called upon to be a lender of last resort in situations of crisis. And I think what we left Europe with or the Euro area with at the time is the impression that we had solidified, we had kind of buttressed the architecture of the Euro area

39:34and that now we were more robust to crisis, which I think is true. So that being said, there are some important political conditions attached to that. And these conditions are that we are lending to countries against a fiscal adjustment program. This was the case with most of the countries we referred to. And even the activation of what was called at the time the OMT announced by Draghi was supposed to be only activated if a country had an ESM program.

40:05So basically what the ECB was effectively saying is, I'm prepared to backstop markets. I'm prepared to move markets away from a bad equilibrium towards a good low interest rate equilibrium, provided you're delivering on your part of the job, which is to basically deliver a sound and credible fiscal path. The problem we have today is that, you know, we have no signs that France is prepared to deliver on a sound fiscal path. And I think as a result of that, it's very unlikely that the ECB can step in.

40:37I think the ECB would have all the power in the world to basically stabilize French debt in a heartbeat. The difficulty is that in order to do that, it needs to see France taking credible long-term steps to consolidate its public finances. And for the reasons that we've talked about before, it's hard to see how politically that can be delivered. Yeah, I was just going to say, Tracy, like this is like, to both of you, this is the core thing. It's like, okay, we'll backstop your debt if you do this fiscal consolidation. If they could do the fiscal consolidation, we wouldn't be in this.

41:08We wouldn't be talking about this, period. So it's like, that's the whole ballgame here. And maybe like in 2011, because things were so dire, it's like, okay, there was a perception that governments would. But obviously, if the political will existed to do that, then we wouldn't even be having this conversation. It's a catch-22. It's a catch-vendeur. Yeah, exactly. It is indeed. But, you know, I think all of these countries in the euro era, which had to go through a very tough fiscal adjustment, you know, didn't really, you know, choose it.

41:39They were kind of, you know, compelled to by a combination of market forces and political forces in Europe. And I think it's very difficult to explain to these countries that things are going to be very different for France. So my sense is politically, it's very difficult for a German chancellor to allow the ECB to backstop French debt without a severe political cost domestically. And so I think there is, you know, a difficult

42:09intra-European political game here. You know, remember that, you know, the biggest threat to the German chancellor today is the rise of the IFD. The IFD was founded as an anti-euro party, precisely opposing these rescue programs in Greece and others. It has moved since. You know, this is no longer a party that is primarily focused on the euro and it's primarily focused on immigration. But I think for Germany, providing a free backstop to France by way of the ECB

42:45is the surest way to increase political support for the IFD. And that's probably not something that this German chancellor can underwrite. So I think we are in a difficult bind. And the ECB, as usual, is in the middle of that political bind. Can we talk about your time as an advisor to Macron a little bit more?

Wealth taxes and fiscal adjustment

43:07So when I think about ways for governments to raise money in perhaps a politically palatable way, one of those, I would think, would be something resembling a wealth tax, right? Like you don't want to impose heavier taxes on a bunch of French citizens, the majority of French citizens and workers who are already protesting in the streets. But maybe you could raise taxes on the wealthy, right? And maybe that would be a politically popular way to raise revenue for the government.

43:41And yet Macron famously got rid of France's wealth tax. Can you explain the thinking behind there and if the wealth tax could ever come back? So that takes us a long way back to 2016, where I was with a few others indeed advising his campaign. And I disagreed with him precisely on that. So, you know, I thought abolishing the wealth tax was a very bad idea, both symbolically, but also economically. I didn't think it was a good idea to have a less progressive tax system.

44:14And I think that costed Macron a lot politically because from that point onwards, he was viewed as or painted as the president of the rich. And I think that undermined a lot of his reform efforts after that. I think he had a very good pension reform in his program in 2017 that he was never able to pass. I think in part because I think from that point onward, he was tainted with the suspicion of, you know, of serving the interest of the rich. So I think that was a mistake.

44:46And indeed, I think now there is no way of consolidating public finances without restoring some form of a wealth tax. At minimum, we will return to the wealth tax that we had in 2017 when Macron arrived. But more certainly, we will do more than that. And, you know, France has been really, the French political debate around wealth tax has been really framed by Gabriel Jucman, who is a French economist, who is also very influential in the U.S. debate and in the current Californian referendum around taxing billionaires.

45:24And he's proposing a very aggressive version of the original French wealth tax. I doubt that we will go as far as the Jucman tax. In fact, interestingly, even Jean-Luc Mélenchon, who is advocating for a wealth tax of his own, you know, has not referred or embraced fully the Jucman tax. But I think the wealth tax is an inevitable part of the adjustment process, as well as I think pension reform is an inevitable part of the adjustment process on the spending side.

45:58And so I think we have these two sacred cows that we'll probably have to sacrifice in order to deliver any meaningful adjustment over the coming years. We hear a lot about, I guess, the sort of China trade question in the context of Germany, and that's huge there. What is the version of that in France these days? And how much similar anxiety is there about, I guess, French industrial giants, et cetera, and their own exposure to surging Chinese exports of higher value added value goods? No, it's a very good question.

46:28So the second China shock has been something that the French policy circles have worked on a lot. And I think they have slowly managed to convince Germany that this was a real issue that Europe should act upon. There was a very important Franco-German non-paper on this a week ago, which I think, you know, sort of crystallized this movement of Germany. And there was, over the last weekend, a deal between the trade commissioner and China, which I think speaks to that willingness of Europe to use more aggressively its trade defense instruments.

47:01But economically speaking, I would say France is a lot less exposed than Germany is. To some extent, de-industrialization has occurred in France already. It is occurring now in Germany. And so to some extent, this is a fight that France has already lost. France is, you know, a lot more than Germany, fundamentally a service-based economy. The one worry I think that France rightly has is in the aeronautical business,

47:33which remains, you know, a very important French export and one where China is not yet competing, but where it might, you know, the days where the Chinese can produce the equivalent of an Airbus A320 are going to be dark days for Europe and for France. And so I think the worry, even though for the auto sector, which is at the heart now of the fight, you know, there's not a, you know, a central concern for France. The worry is that, you know, that, you know, moves an entire industrial landscape in Europe

48:08that could end up, you know, being pretty detrimental to France, to France too.

Finding a circuit breaker

48:12So in classic debt crises, you often need some sort of circuit breaker to put a stop to the dynamics that are making, that are making debt deteriorate and then everyone getting more worried and then the debt deteriorates further, etc. With the original Eurozone crisis, that was the ECB's famous whatever it takes statement. What do you see as the most likely circuit breaker for this particular French entanglement? I think we will need two things. One is we will need to have some national consensus emerging on fiscal policy.

48:49And, you know, I said some critical words earlier about the German deadbreak and I stand by that. I think the German deadbreak was poorly designed. But I think the good thing that Germany has created was a national consensus on fiscal policy. And it has even now, after this election, actually called upon a commission of experts to try and design the new German fiscal rule. So I think France would need something to that effect. Essentially, you know, Macron calling on all the political parties to nominate one or two experts

49:26and for these experts to agree on a consensual debt rule for the next decade. I think we need that kind of, you know, political commitment as a first circuit breaker. And I think once we have that, the second circuit breaker is easier to activate. And that's essentially the ECB, either the OMT. So that takes us back to the framework that you've described during the euro crisis. So essentially some kind of an ESM-like program with OMT interventions.

49:58Or, because there has been a new instrument invented by the ECB since, and that has never been used, the transmission policy instrument, TPI, which can be activated without a program. And I tend to think that this is a more desirable outcome. But it can only be activated if the country in question is deemed compliant with the European fiscal rules. And in order to be compliant with the European fiscal rules, you essentially need what I've

50:29described above, which is a political commitment and the political capacity to commit to a fiscal adjustment that is credible over the medium term. So I think the building blocks for solving this crisis are within reach. And at the same time, I struggle to see how they happen on this side of the French elections. And so it's both, you know, on the horizon. And at the same time, I struggle to see a catalyst now to make the situation better.

51:02Jehine Vallée, thank you so much. That was an excellent description of what's going on. Really appreciate you coming on AdLots. Maybe we'll talk again around election season. Thank you. Pleasure. I thought he was great. We covered a lot of ground. Yeah, we really did. You know, I really do think the core thing is that Ketche Vendee that you identified, or

51:35I guess that I identified and you identified as a Ketche Vendee. It's like, yes, you can have a bailout in exchange for fiscal consolidation. In exchange for fixing the problem that is necessitating the bailout. But if you were going to fix the problem, you wouldn't have needed the bailout in the first place. And so it seems like a real pickle, to say the least. It does indeed. I mean, the other thing I keep thinking is there's a few ways to get out of a debt crisis, right? I think the one that everyone would prefer is to grow your way out of it. That seems like a long shot in the case of France.

52:07The other way is through fiscal austerity, which, as we discussed, is politically unpopular. Financial repression, which we kind of touched on with the idea of canceling out some of the bonds owed to the ECB. You know, that might be a viable option for a place like France, especially if French banks currently don't hold that much French debt. It's kind of risky, but it could happen. You can inflate your way out of debt. But I feel like sort of all of these are on the table, except maybe serious fiscal austerity.

52:40I don't know. That's the thing everyone wants to trick, you know, everyone. And arguably, look, someone will get mad at me about saying this, but like arguably even like I think the obsession, it's not a wealth tax per se. Actually, I think a wealth tax in general. So in the West where there is such extreme inequality and so many people have made their money thanks to asset prices as opposed to incomes. We're going to at some point. I feel like there has to be more discussion about that.

53:11I do think like I'm sort of skeptical that the whole thing can just be solved by like we're going to tax billionaires more. Because we would all like to imagine that that would be enough because most of us aren't billionaires, etc. I presume it's all it's all very tricky. What's shocking to me is I don't know if it's the Overton window or whatever, but I do remember the 2002 Prime Minister Lionel Jospin losing in the first round runoff to Jean-Marie Le Pen and that was just like such an earthquake and obviously a sign of things to come politically

53:46in Europe. And now the idea of like, well, if only we could get his daughter Marine Le Pen in and a stable assembly for her, then we could get like that. She's like firmly within the sort of like normie politics now, which probably speaks to some moderation on her part of the Le Pen family's ideology, but also just like how much has changed that if the sort of Le Pen Maloney style politics like that would be very like acceptable as opposed to investors at this point.

54:18Can I say one thing about the wealth tax? Yeah. You could imagine in a world where AI does more and more of the work. Yeah. That it's going to be harder for governments to get money out of taxing labor. Yeah. Right. No, it's going to be a huge deal. You have to tax the capital because the capital is the one generating all the wealth. So I feel like that's going to be, I mean, it already is a subject for serious conversation, but perhaps even more so in our AI powered future. Yeah. Anyway.

54:48Anyway, great conversation. I'm glad we did it. Should we leave it there? Let's leave it there. This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at Carmen Herman, Dashiell Bennett at Dashbot, Kale Brooks at Kale Brooks, and Kevin Lozano at Kevin Lloyd Lozano. And you can chat about all of these topics 24-7 in our Discord, discord.gg slash oddlots. And for more Odd Lots content, check out our daily newsletter, which you can find at

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