France's public sector liabilities could trigger a financial crisis threatening the entire European Union, according to a leading analyst who warns that only an unprecedented intervention by Brussels could prevent disaster.
Tax consultant Bob Lyddon estimates that France would need €1.8 trillion (£1.6 trillion) over two years if its public sector borrowers were shut out of financial markets, leaving European leaders facing a potential rescue operation on an extraordinary scale.
Analysis of France's liabilities
In an analysis published on October 7, Mr Lyddon estimates that France's total public sector liabilities, including debts and contingent liabilities, amount to 169% of its gross domestic product (GDP).
Mr Lyddon said: “The total, comprising debts and contingent liabilities, is 169% of France’s GDP.” His estimate uses year-end 2021 figures and the methodology employed in his 2023 book examining the hidden liabilities of EU member states.
Financing requirement details
The warning comes as the EU faces the prospect of having to protect one of its largest economies from a financial shock that could spread across the bloc. Mr Lyddon said a potential assistance programme would have to assume French public sector borrowers were unable to access financial markets for at least two years.
He said: “During that time all maturities would have to be rolled over, and the national fiscal deficit would have to be financed annually as well.”
Assuming French debts have an average life of seven years, €702 billion would need to be refinanced annually. France's national fiscal deficit adds another €185 billion a year, based on a 5% deficit against a GDP of €3.7 trillion. That would bring the total financing requirement to €887 billion annually, or €1.8 trillion over two years.
EU rescue mechanism concerns
Mr Lyddon warned: “This figure should be regarded as a minimum, as the lock-out period from direct access to capital markets could be longer, and the total public sector deficit could be higher than the 5% of GDP at the central government level.”
The scale of the potential rescue would dwarf the resources available through the eurozone's existing bailout arrangements. Mr Lyddon said: “The European Stability Mechanism has nowhere near that amount of firepower.”
He also dismissed the European Central Bank's Transmission Protection Facility as an answer, arguing that although it is supposedly unlimited in size, it is intended for different purposes.
Proposed EU borrowing plan
Instead, he believes the EU would have to borrow the entire amount itself, with member states jointly liable for the debt. Mr Lyddon said: “The solution must be to borrow the entire amount on the name of the European Union itself, for whose debts all EU member states are jointly-and-severally liable.”
He pointed to the bloc's Coronavirus Recovery programme, now known as Next Generation EU, as the model for such an arrangement. Under his proposal, the EU would buy €2 trillion of French public sector bonds over two to three years, allowing France to receive support without being formally designated as a bailout case.
Mr Lyddon said: “It is the only possible solution as the EU and Eurozone simply cannot risk France – one of the two mainstays of the EU – becoming designated as ‘in bailout’. That would crash the European project.”
He warned that the consequences could extend far beyond France, with the credit ratings of EU institutions falling and their bonds potentially losing their status as safe assets. European banks could then find themselves undercapitalised.
Mr Lyddon added: “It could plunge the Western world into deep recession, embolden Russia to more military adventures, deepen the divisions with the USA…”
The proposed rescue would leave other EU member states exposed to France's ability to recover economically and repay the debt. Mr Lyddon said: “The other EU member states are just going to have to accept the logic of the arrangement they have become involved in, and suck up that they are dependent upon the recovery of France’s economy.”
His analysis sets out a potential crisis scenario rather than predicting that France will inevitably require a bailout. But he warns that if the country lost access to financial markets, the EU could be forced to take unprecedented action to protect its own financial stability.
