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

An episode of [Odd Lots](https://invisiblenetwork.ai/podcast/1056200096), 16 Oct 2026, 48 min.

Audio: https://podtrac.com/pts/redirect.mp3/tracking.swap.fm/track/UVBrz8bN8aM2Xe47PEPu/traffic.omny.fm/d/clips/e73c998e-6e60-432f-8610-ae210140c5b1/8a94442e-5a74-4fa2-8b8d-ae27003a8d6b/9eaa512a-78cf-4f3a-b125-b4e401078052/audio.mp3?utm_source=Podcast&in_playlist=982f5071-765c-403d-969d-ae27003a8d83

Just about everyone is worried about what is going on in France right now: the country's public finances are in sorry shape and there are fears that the French bond selloff, and the country's growing debt crisis, might spillover into the rest of Europe. On top of that, the 2027 elections have investors worried: The two leading candidates, Marine Le Pen and Jean-Luc Mélenchon, aren't seen to be up to the task of taming France's fiscal turmoil. Shahin Vallée was an advisor to Emmanuel Macron when he was an economic minister and during his first presidential election campaign. Since then, he's paid close attention to the situation in France — he is currently a senior fellow at the German Council of Foreign Relations and he advises institutional investors — and he understands, better than most, what went wrong during Macron's nine years in office. Today, he speaks to us about the origins of the current French debt crisis, how similar it is to the challenges Greece faced during the first euro crisis, and why the 2027 elections are making an unstable situation even worse. Read more: Market for Funding Bonds in France Shows Crisis Is Way Off Bank of France Survey Shows Sharp Jump in Business Uncertainty Only Bloomberg - Business News, Stock Markets, Finance, Breaking & World News subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlots Subscribe to the Odd Lots Newsletter Join the conversation: discord.gg/oddlots See omnystudio.com/listener for privacy information.

## Transcript

[0:02] Speaker 1: Bloomberg Audio Studios. Podcasts. Radio.
[0:06] Speaker 2: News.
[0:18] Speaker 1: Hello and welcome to another episode of the Odd Lots Podcast.
[0:22] Speaker 1: I'm Joe Weisenthal.
[0:23] Speaker 3: And I'm Tracy Allaway.
[0:24] Speaker 1: Tracy, I don't know about you, but, uh... I don't
[0:27] Speaker 1: think we need another euro crisis right now. Like, we
[0:30] Speaker 1: have a lot going on on our plate these days.
[0:33] Speaker 1: There's a bunch of stuff to be anxious about, a
[0:36] Speaker 1: lot of moving things. The last thing we need is
[0:39] Speaker 1: to be talking about European bond spreads yet again.
[0:42] Speaker 3: And yet, and yet, here we are.
[0:43] Speaker 1: Well, we have no choice, right? It's right there. Well,
[0:46] Speaker 1: the other thing I.
[0:46] Speaker 3: Was thinking, so the first eurozone crisis was sort of,
[0:51] Speaker 3: I guess, 2011 to 2015, 2016.
[0:52] Speaker 2: Yeah.
[0:56] Speaker 3: I can't decide if that feels like it was ages
[0:58] Speaker 3: ago or just yesterday.
[0:59] Speaker 1: I would go with ages ago. I mean, there's so
[1:02] Speaker 1: much that's happened since then. And it all seems like
[1:05] Speaker 1: not only does it seem like a long time ago,
[1:07] Speaker 1: sort of in clock time and how much has happened,
[1:10] Speaker 1: seems a little quaint in the sense of like, OK,
[1:14] Speaker 1: there is these spreads and Greece, et cetera. Then it
[1:18] Speaker 1: was kind of solvable. Margot Draghi came out and said
[1:21] Speaker 1: whatever it takes and that they were there to close
[1:23] Speaker 1: spreads and stuff. And then it more or less went away.
[1:25] Speaker 1: There were some referendums and stuff like that. But like
[1:28] Speaker 1: it was a tractable problem and they did ultimately fix
[1:30] Speaker 1: it compared to some of the big sort of seismic
[1:33] Speaker 1: questions that we seem to be dealing with today.
[1:35] Speaker 3: It got fixed. And if you look at Greek bond
[1:38] Speaker 3: yields now, which were, you know, the epicenter of the
[1:42] Speaker 3: original Eurozone crisis, I mean, they've recovered enormously. And now
[1:47] Speaker 3: the key difference, this is a sort of classic history
[1:50] Speaker 3: doesn't repeat, but maybe it does rhyme thing. The country
[1:53] Speaker 3: or the Eurozone member that everyone is worried about now
[1:57] Speaker 3: is one that was viewed as relatively strong just 15
[1:59] Speaker 3: years ago, and that is France. French bonds no longer
[2:03] Speaker 3: the GOAT. Did you get that? Oh, come on.
[2:07] Speaker 2: GOAT.
[2:08] Speaker 1: Like oats?
[2:08] Speaker 3: G-O-A-T.
[2:09] Speaker 1: Yeah, that's good. Like oats.
[2:11] Speaker 3: Okay, let me do something easier. French bond yields are
[2:14] Speaker 3: out of control. There we go.
[2:15] Speaker 1: Oh, that's a good one. That I definitely get.
[2:17] Speaker 3: The good thing about it being France is that you
[2:19] Speaker 3: have a lot more opportunities to make puns.
[2:22] Speaker 1: That's right. We should have plenty of opportunities. I used
[2:24] Speaker 1: to speak French, by the way, and then I forgot it.
[2:27] Speaker 1: The first euro crisis was about peripheral Europe. And so
[2:30] Speaker 1: Greece was sort of seen as the worst, but Cyprus
[2:34] Speaker 1: also had a very rough time, and Italy and Spain,
[2:38] Speaker 1: et cetera. Portugal had some dicey moments, et cetera. This
[2:42] Speaker 1: is like much different. And as you're right, like the
[2:45] Speaker 1: country that everyone is honed in on is France right now.
[2:49] Speaker 1: Core Europe always perceived during the first euro crisis a
[2:53] Speaker 1: little bit weaker than Germany, which is core core, but
[2:56] Speaker 1: still like by and large, one of the relatively safer ones.
[3:00] Speaker 1: And it's also not as straightforwardly about debt, right? There
[3:05] Speaker 1: are debt concerns, there are deficit concerns. But also like
[3:09] Speaker 1: there are some like deep political concerns.
[3:11] Speaker 3: Yeah.
[3:11] Speaker 1: We're going to talk about that. But I think a big,
[3:13] Speaker 1: just simple part of the story is when people look
[3:15] Speaker 1: at the election that's coming up in 2027, they do
[3:18] Speaker 1: not see much prospect for like a sort of like
[3:21] Speaker 1: centrist Macron-esque campaign. type of candidate. And I think they're
[3:24] Speaker 1: worried about like who's going to be running the country
[3:27] Speaker 1: in a few months.
[3:28] Speaker 3: So this is always my question when it comes to
[3:30] Speaker 3: debt crises, because often you see that the fiscal fundamentals,
[3:34] Speaker 3: they're kind of the same for ages and ages and ages.
[3:36] Speaker 3: I don't think France has run a budget surplus for
[3:39] Speaker 3: the entirety of our lives, right? Like this has been
[3:42] Speaker 3: the French debt story for ages. So I'm always very
[3:45] Speaker 3: curious what the actual catalyst is for people to start
[3:48] Speaker 3: getting worried about these things and for yields to actually
[3:51] Speaker 3: start shooting up.
[3:52] Speaker 2: Totally.
[3:52] Speaker 1: Well, anyway, even though we do not need another Euro
[3:57] Speaker 1: crisis right now, we have no choice. We have to
[4:00] Speaker 1: talk about what's going on. And we really do have
[4:03] Speaker 1: the perfect guest. We're going to be speaking with Shaheen Vallee.
[4:05] Speaker 1: He's a senior fellow at the German Council on Foreign Relations.
[4:09] Speaker 1: He's an advisor to institutional investors. He once was an
[4:13] Speaker 1: advisor to Macron when he was an economy minister. This
[4:16] Speaker 1: was in 2014, 2015. Even advised him on his campaign
[4:20] Speaker 1: for a while in 2016 before parting ways before the
[4:23] Speaker 1: actual vote in 2017. So someone who really, like I said,
[4:27] Speaker 1: the perfect guest. So Shaheen, thank you so much for
[4:29] Speaker 1: coming on the podcast.
[4:31] Speaker 2: Thank you for your invitation.
[4:32] Speaker 1: Why don't you give us a little bit of background?
[4:35] Speaker 1: Tell us about the time when you were an advisor
[4:39] Speaker 1: to current President Emmanuel Macron. What capacity was that? What
[4:43] Speaker 1: role was he in at that time? What were you
[4:45] Speaker 1: doing for him?
[4:46] Speaker 2: So I first met Macron in 2012. I had just
[4:50] Speaker 2: joined the cabinet of Hermann von Rompuy, the president of
[4:53] Speaker 2: the European Council, who I was advising. And Macron was
[4:58] Speaker 2: my counterpart because he was advising President Hollande at the time.
[5:01] Speaker 2: And so we've spent... A good two years, the second
[5:05] Speaker 2: mandate of President Van Rompuy, working very closely on a
[5:09] Speaker 2: lot of actually euro crisis issues from Cyprus to Greece
[5:14] Speaker 2: and others. And so when he was appointed minister in
[5:18] Speaker 2: the fall of 2014, which also coincided with the end
[5:22] Speaker 2: of the mandate of Van Rompuy, I joined him in Paris,
[5:26] Speaker 2: in Bercy. And I worked with him primarily on... on
[5:31] Speaker 2: European issues, on European economic issues. And the Greek crisis
[5:35] Speaker 2: at the time was still in the background. This was
[5:38] Speaker 2: just a few months before Syriza and Greece got to power.
[5:41] Speaker 2: And I actually knew Varoufakis from a previous life. And
[5:46] Speaker 2: I actually introduced Emmanuel Macron and Varoufakis. They actually got
[5:49] Speaker 2: along very well. And Macron, I think, did as much
[5:53] Speaker 2: as he could to try and help Greece during this
[5:56] Speaker 2: pretty pivotal moment. I think he was one of the
[5:58] Speaker 2: few French politicians who really understood what was going on
[6:02] Speaker 2: and who tried as much as he could to help.
[6:05] Speaker 2: But I think the situation in Greece got out of hands,
[6:07] Speaker 2: and then the rest is history. But I think it's
[6:10] Speaker 2: interesting to be reminded of Greece today, because I think
[6:14] Speaker 2: some of the debates that I see emerging in France
[6:17] Speaker 2: really remind me of these moments. In particular, I think
[6:20] Speaker 2: some of the arguments that are being made by La
[6:23] Speaker 2: France Insoumise, for instance, around what can we or cannot
[6:27] Speaker 2: do with France's debt, really remind me of some of
[6:31] Speaker 2: the arguments that Varoufakis was making at the time and
[6:35] Speaker 2: that he sort of, you know, went headfirst in a
[6:39] Speaker 2: confrontation with the Eurogroup first and then with the ECB,
[6:42] Speaker 2: which ended pretty badly. And I worry that people from
[6:47] Speaker 2: La France Insoumise have not learned that lesson yet. and
[6:51] Speaker 2: may be heading for the same confrontation. I doubt Jean-Luc
[6:55] Speaker 2: Mélenchon will be the next president, so we may be
[6:58] Speaker 2: spared that confrontation, but I think it still lingers in
[7:00] Speaker 2: the background. And maybe when we talk about politics, I'll
[7:03] Speaker 2: say more about this, but I think that's an important
[7:06] Speaker 2: setup to be reminded of.
[7:07] Speaker 3: So we're definitely going to talk about all of that,
[7:10] Speaker 3: but why don't we talk about, I guess, the proximate
[7:13] Speaker 3: cause of the latest concern? And I decided to fact
[7:17] Speaker 3: check what I said in the intro about when France
[7:20] Speaker 3: last had a budget surplus. So France hasn't had a
[7:23] Speaker 3: budget surplus for more than 50 years at this point,
[7:26] Speaker 3: so our entire lifetime. Why are people worried about French
[7:30] Speaker 3: debt now?
[7:31] Speaker 2: I think they're worried about French debt not because there
[7:34] Speaker 2: is anything new about fiscal policy. The budget that was
[7:38] Speaker 2: announced is pretty much in line with expectation. In fact,
[7:41] Speaker 2: it's probably a touch better than what was expected. I
[7:44] Speaker 2: think what has changed in the last few weeks is
[7:46] Speaker 2: the perception of the political risk. And I think for
[7:49] Speaker 2: two reasons. The first is that I think people have
[7:53] Speaker 2: repriced the odds of a centrist candidate getting to the
[7:57] Speaker 2: second round. I think for a long time, people assumed
[8:00] Speaker 2: that essentially the runoff would be between Marine Le Pen
[8:03] Speaker 2: on one end and on the other. some sort of
[8:07] Speaker 2: centrist candidate emerging. It was not clear who, but Edouard
[8:11] Speaker 2: Philippe was probably the best positioned centrist candidate. And I
[8:13] Speaker 2: think what we've seen since the summer is these centrist candidates,
[8:19] Speaker 2: pretty much all of them, not only dropping in the
[8:22] Speaker 2: polls in the first round, but also, and I think
[8:24] Speaker 2: that's probably the more worrying thing, also pretty much now
[8:27] Speaker 2: all of them losing in the second round against Le Pen.
[8:30] Speaker 2: So I think that's the first change. And as a result...
[8:35] Speaker 2: what has emerged as the most likely runoff is a
[8:37] Speaker 2: runoff between Marine Le Pen on one hand and Jean-Luc
[8:41] Speaker 2: Mélenchon on the other. And, you know, one could think that,
[8:44] Speaker 2: you know, the polls are so clear about the fact
[8:47] Speaker 2: that Marine Le Pen is going to win, that, you know,
[8:50] Speaker 2: it's going to win if she is in a runoff
[8:52] Speaker 2: versus Mélenchon, I mean, that it shouldn't matter so much.
[8:57] Speaker 2: And I think here there's been really something really new
[9:00] Speaker 2: in the last few weeks, which is the realization that
[9:04] Speaker 2: we're not only looking at a presidential election, we're looking
[9:08] Speaker 2: at a presidential election and a month after at a
[9:11] Speaker 2: general election. The general election hasn't been called yet. We
[9:14] Speaker 2: don't have a date. The next president will likely dissolve
[9:18] Speaker 2: the current parliament and call for a new election in
[9:20] Speaker 2: order to be able to govern with a new majority.
[9:23] Speaker 2: And I think what is emerging now, which I think
[9:25] Speaker 2: was not in the picture of most people's mind, is
[9:27] Speaker 2: the fact that Marine Le Pen, who was thought to
[9:31] Speaker 2: be able to govern with a center-right majority if she
[9:35] Speaker 2: needed to, is probably going to face a very difficult
[9:39] Speaker 2: general election. So she might well win the presidential election,
[9:43] Speaker 2: but she could struggle to actually have a majority in
[9:47] Speaker 2: the general election, especially if she's facing a strong far-left
[9:52] Speaker 2: opponent like Mélenchon is. And so I think for the
[9:55] Speaker 2: first time we have seen emerge the risk that France
[9:59] Speaker 2: post these elections in 2027 is actually in a worse
[10:04] Speaker 2: place now insofar as being able to decide about fiscal
[10:07] Speaker 2: policy than it is today. We're already in a pretty
[10:09] Speaker 2: bad place since the elections in 2024 where Macron doesn't
[10:13] Speaker 2: have a majority in parliament and therefore has created doubts
[10:18] Speaker 2: about passing every budget since. And I think markets were
[10:22] Speaker 2: giving the benefit of the doubt to France, assuming that
[10:25] Speaker 2: by 2027, we would have a president and a parliament
[10:30] Speaker 2: being able to pass a credible fiscal adjustment. And I
[10:34] Speaker 2: think we're waking up to the fact that we may
[10:37] Speaker 2: not have that. And I think that what most people
[10:42] Speaker 2: expected and most people who thought Le Pen could win expected,
[10:45] Speaker 2: which is that we would end up with a government
[10:50] Speaker 2: that will be in spirit quite similar to the government
[10:52] Speaker 2: we've had in Italy since the arrival of Meloni, essentially
[10:56] Speaker 2: a center right to the far-right government that has to
[11:01] Speaker 2: be fairly pro-European and has to be fairly compliant with
[11:05] Speaker 2: European fiscal rules. I think that scenario of a Meloni-like
[11:10] Speaker 2: transition is slowly being de-priced. And I think it's right,
[11:14] Speaker 2: because I think there are a few reasons why France
[11:16] Speaker 2: is not Italy. And I think it's important to unpack that.
[11:20] Speaker 2: I think the one thing that is true across Europe
[11:24] Speaker 2: is that most of these far-right political parties have indeed
[11:28] Speaker 2: stopped being fundamentally anti-European. I think, in fact, they're actually
[11:33] Speaker 2: organized around European positions, sometimes more than the mainstream parties.
[11:38] Speaker 2: They have a different European agenda. They want a white
[11:41] Speaker 2: and Christian Europe for the most part. But they have
[11:44] Speaker 2: stopped fighting against the Euro, fighting against the EU. But
[11:49] Speaker 2: in France, Le Pen would be in a different position
[11:52] Speaker 2: than Meloni because France is a net contributor to the
[11:54] Speaker 2: EU budget. And so Le Pen could pick up a
[11:57] Speaker 2: fight with the EU on the EU budget, which is
[11:59] Speaker 2: actually being negotiated now in a way that I don't
[12:01] Speaker 2: think Meloni was in a position to when she arrived
[12:04] Speaker 2: in power because Italy was the net recipient of 300
[12:08] Speaker 2: billion of new funds from the recovery and resilience facility.
[12:12] Speaker 2: So I think there are several reasons why France and
[12:17] Speaker 2: France led by Le Pen could have a much more
[12:19] Speaker 2: antagonistic attitude towards the EU and much more difficulty in
[12:25] Speaker 2: putting together a coalition than Meloni had.
[12:43] Speaker 1: You know, if we went back 10 or 15 or
[12:46] Speaker 1: I guess like 25 years ago when Le Pen's father
[12:52] Speaker 1: and the thought that like he would make the runoff, etc.,
[12:55] Speaker 1: was just like such a shock to all of Europe.
[12:58] Speaker 1: I forget who he was running against in 2001 or two.
[13:02] Speaker 2: Against Schreck in 2002.
[13:04] Speaker 1: And that was like such a shock. And now, as
[13:07] Speaker 1: you describe it, it's like, OK, like the markets are
[13:10] Speaker 1: sort of cool. And it's like I'm with the idea
[13:13] Speaker 1: of like Le Pen's coming in. And I was unclear
[13:15] Speaker 1: whether it's just has the Overton window shifted, has the
[13:18] Speaker 1: quote far right shifted. But what I'm curious about, like, OK,
[13:22] Speaker 1: across the West, we've seen the collapse of like centrist
[13:24] Speaker 1: or center parties or centrist. Is there anything distinct about France,
[13:28] Speaker 1: why the floor has fallen out for the center? Or
[13:32] Speaker 1: is it just the exact same thing that we've seen
[13:34] Speaker 1: basically everywhere in the Western world, whatever that malaise is,
[13:39] Speaker 1: that there's just no appetite for sort of centrism anymore?
[13:43] Speaker 2: No, I don't think France is unique. You know, I
[13:46] Speaker 2: think I've said before that Emmanuel Macron would sadly be
[13:50] Speaker 2: our Renzi in Italy, kind of the last force of
[13:55] Speaker 2: the center who's trying to hold the center together and
[13:59] Speaker 2: who eventually fails to do so. And so very much
[14:02] Speaker 2: like Renzi, he's leaving the center, and by that I
[14:06] Speaker 2: mean both the center left and the center right, in
[14:10] Speaker 2: complete disarray. The Socialist Party had its primary this past
[14:15] Speaker 2: weekend in and only 120,000 voted in this primary. In
[14:21] Speaker 2: the last presidential election, it was more than a million. So,
[14:25] Speaker 2: you know, so I think that says something about the
[14:27] Speaker 2: loss of energy, the loss of appetite. And in fact,
[14:31] Speaker 2: the real polarization of, you know, I think, politics in
[14:35] Speaker 2: most Western countries, but, you know, politics in France in particular,
[14:39] Speaker 2: where you actually have now two clear contenders, Le Pen
[14:43] Speaker 2: and Mélenchon, coming from, you know, the opposite sides of
[14:47] Speaker 2: the political spectrum and pretty much nothing of relevance in
[14:50] Speaker 2: the middle.
[14:50] Speaker 3: Can you characterize Le Pen's, I guess, fiscal attitude or
[14:55] Speaker 3: fiscal stance? Because I see these headlines that, you know,
[14:57] Speaker 3: she wants more public spending cuts, but then I also
[15:00] Speaker 3: see headlines that are like, oh, and also... We're going
[15:03] Speaker 3: to reduce the pension age again, which I always thought was,
[15:06] Speaker 3: you know, one of the sources of fiscal weakness in France.
[15:10] Speaker 2: It's a very important question and a very difficult one
[15:14] Speaker 2: because there has been different views expressed by the Rassemblement
[15:18] Speaker 2: National on its fiscal policy. I think there's been a
[15:21] Speaker 2: turn that was initiated by Jordan Bardella, which was to
[15:25] Speaker 2: basically make the party or the political line a lot
[15:29] Speaker 2: more fiscally orthodox. And he came up with the possibility
[15:33] Speaker 2: of moving the pension age higher. And he kind of gave,
[15:37] Speaker 2: I think, all the signals to French businesses and to
[15:41] Speaker 2: markets that he could be compatible with a traditional sort
[15:44] Speaker 2: of center-right neoliberal economic policy. Le Pen comes from a
[15:49] Speaker 2: place where she, I think, is more committed to social spending.
[15:53] Speaker 2: She's more committed to protecting pensioners. And so I think
[15:57] Speaker 2: she hasn't quite made that U-turn. What's very interesting, however,
[16:01] Speaker 2: is that last week, on October 6th, she presented a
[16:05] Speaker 2: new and very bold fiscal rule that she would want
[16:09] Speaker 2: to introduce in the French Constitution by way of a referendum.
[16:14] Speaker 2: And that fiscal rule basically mandates a very significant fiscal adjustment.
[16:20] Speaker 2: So she wants to bring the deficit back to the
[16:24] Speaker 2: debt-stabilizing deficit. So that's roughly cutting the deficit in half
[16:28] Speaker 2: almost immediately. And so long as France is not reaching
[16:33] Speaker 2: that debt-stabilizing deficit, she wants to have a minimum of 0.5%
[16:36] Speaker 2: of GDP of fiscal adjustment, which is roughly in line
[16:40] Speaker 2: with what the European fiscal rules mandate. But the portion
[16:44] Speaker 2: that she's introducing is that this would continue basically so
[16:47] Speaker 2: long as debt to GDP has not converged back to 60%.
[16:50] Speaker 2: So on paper, it's a very strict fiscal adjustment. The
[16:56] Speaker 2: governance of it is also extraordinarily tight in the sense
[16:59] Speaker 2: that no budget that doesn't meet this rule can be passed. Otherwise,
[17:02] Speaker 2: it has to be blocked by the Constitutional Court. And
[17:06] Speaker 2: a majority of three-fifths of Parliament... needs to approve a
[17:10] Speaker 2: budget that would not respect that rule in the case
[17:13] Speaker 2: of an emergency, a recession, a war, an energy crisis.
[17:18] Speaker 2: And that can only be done for two years. Otherwise,
[17:20] Speaker 2: it has to be approved by referendum. So she's setting
[17:24] Speaker 2: the bar in terms of fiscal orthodoxy even higher than
[17:29] Speaker 2: the German debt break is setting it. So I think
[17:32] Speaker 2: she's understood that it was very important to signal that
[17:37] Speaker 2: something strong on fiscal policy. Where I see a bit
[17:40] Speaker 2: of cognitive dissonance is that she's saying that, and on
[17:44] Speaker 2: the other hand, she hasn't really put the policies that
[17:47] Speaker 2: would deliver that kind of fiscal adjustment. So she hasn't
[17:49] Speaker 2: said anything substantial on the pension reform, for instance. And
[17:52] Speaker 2: so you have a weird situation where she's saying something
[17:56] Speaker 2: very bold, and in my view, almost too bold to
[17:59] Speaker 2: be credible. on the fiscal front. And she's not backing
[18:03] Speaker 2: that with concrete steps to deliver on these promises. And
[18:07] Speaker 2: so I don't think that tension is going to be
[18:11] Speaker 2: able to survive. At some point, she's going to have
[18:13] Speaker 2: to disappoint someone. Either she will have to disappoint markets
[18:16] Speaker 2: by saying, actually, what I committed to fiscally, I can't deliver.
[18:22] Speaker 2: or she'll have to disappoint her electorate by actually saying, well,
[18:25] Speaker 2: my commitment to fiscal orthodoxy means we have to put
[18:29] Speaker 2: the pension age back to 65 or plus, for instance.
[18:32] Speaker 2: I think that internal discussion inside the Rassemblement National hasn't
[18:37] Speaker 2: been settled. It may be settled... during the campaign if
[18:42] Speaker 2: fiscal policy becomes a big part of the discussion, and
[18:45] Speaker 2: it might, and I think the stress in financial markets
[18:47] Speaker 2: might help to propel fiscal discussions at the heart of
[18:50] Speaker 2: this campaign. It's striking that even though we're at quite
[18:54] Speaker 2: stressed levels in the French spread, fiscal policy hasn't been
[18:59] Speaker 2: really at the heart of the policy debate so far.
[19:03] Speaker 2: I think it will come, but so far it's been
[19:06] Speaker 2: rather timid. And what's interesting is the recomposition that we're
[19:10] Speaker 2: seeing around these fiscal issues. Essentially, the center-right all the
[19:15] Speaker 2: way to the far-right has basically all embraced some version
[19:20] Speaker 2: of a constitutional debt rule. They each have different parameters
[19:25] Speaker 2: and different preferences, but more or less, they're all agreeing
[19:28] Speaker 2: on that. The left, the Socialist Party and the Greens
[19:31] Speaker 2: haven't said anything about this. And La France Insoumise has
[19:35] Speaker 2: been very explicitly against it. And so you have a
[19:39] Speaker 2: debate that is going to be polarized around the fiscal issue.
[19:43] Speaker 2: And what is not clear to me yet is whether
[19:46] Speaker 2: that polarization around fiscal issues is not going to actually
[19:50] Speaker 2: help La France Insoumise. in the sense that today Mélenchon
[19:55] Speaker 2: is out saying very strongly that he's opposed to Le
[19:59] Speaker 2: Pen's fiscal rule, that he's the one who is prepared
[20:02] Speaker 2: to stand up to markets, that he's the one fighting
[20:07] Speaker 2: the governor of the Banque de France or the ECB
[20:10] Speaker 2: president around what they're seeing around the French fiscal situation.
[20:13] Speaker 2: So it could be that, and this is why I
[20:16] Speaker 2: was referring to Varoufakis earlier, It could be that, you know,
[20:20] Speaker 2: Mélenchon becomes our Varoufakis and that he gets some political
[20:25] Speaker 2: credit for it.
[20:26] Speaker 1: What do you mean by that? And tell us a
[20:28] Speaker 1: little bit more about Mélenchon, some of the economic things
[20:33] Speaker 1: he said. I think he's talked about like canceling French debt.
[20:36] Speaker 1: Didn't he also have like he went after the French
[20:39] Speaker 1: central banker, etc.? Talk to us a little bit more
[20:42] Speaker 1: about those Varoufakis parallels and some of what he said,
[20:46] Speaker 1: and then maybe the gap between what he said and
[20:48] Speaker 1: what might be realistic.
[20:50] Speaker 2: The Varoufakis parallel is to illustrate the fact that Varoufakis
[20:53] Speaker 2: actually had a lot of political support in Greece and
[20:56] Speaker 2: in fact won the referendum that he called for, which
[20:59] Speaker 2: was opposing the fiscal adjustment program. And yet he was
[21:03] Speaker 2: not able to deliver on the fact that he had
[21:05] Speaker 2: won that referendum. And so, you know, I see a
[21:08] Speaker 2: strong parallel with what Mélenchon is proposing today, which may
[21:13] Speaker 2: get a lot of support, but which I don't think
[21:17] Speaker 2: will be very realistic. For instance, you know, Mélenchon is
[21:21] Speaker 2: still campaigning, although a bit more quietly these days, on,
[21:25] Speaker 2: you know, bringing back the pension age to 60 years old.
[21:28] Speaker 2: But what I think he's made most headlines for in
[21:32] Speaker 2: the last few weeks is his idea that, you know, yes,
[21:37] Speaker 2: the French debt is very high, but in fact, a
[21:40] Speaker 2: large portion of that debt, about 20% of it, is
[21:43] Speaker 2: owed to the French central bank because the ECB, You know,
[21:50] Speaker 2: intervened during both the euro crisis, but also after during
[21:55] Speaker 2: the COVID crisis. And as a result, this debt that
[21:58] Speaker 2: we owe to ourselves, we could cancel it. So he
[22:02] Speaker 2: used a few different expressions, which I think betray very
[22:06] Speaker 2: interesting debates that are taking place inside La France Insoumise,
[22:09] Speaker 2: but more broadly in economic circles around what is possible
[22:12] Speaker 2: with debt monetization and what is not. The first expression
[22:16] Speaker 2: he used was the debt that we have at the
[22:19] Speaker 2: Banque de France, I will throw it to the fire.
[22:23] Speaker 2: I will basically cancel it. And then he used another expression,
[22:27] Speaker 2: which was betraying some internal discussions they were having and
[22:30] Speaker 2: some changes where he said, you know, instead of throwing
[22:32] Speaker 2: it to the fire, he said, I'll put it in
[22:33] Speaker 2: the freezer. And by that, he meant instead of canceling it.
[22:39] Speaker 2: what we could do essentially is ask the ECB to
[22:42] Speaker 2: roll this debt in perpetuity. So instead of eventually this
[22:47] Speaker 2: debt maturing and the French government having to roll it
[22:51] Speaker 2: and issue that in the bond market, we could basically
[22:54] Speaker 2: ask the ECB, in this case the Banque de France,
[22:57] Speaker 2: to roll this at infinitum. And it's true that if
[23:00] Speaker 2: we did that, That would reduce at the margin the
[23:05] Speaker 2: cost of financing France's debt. So he's put this on
[23:10] Speaker 2: the table, I think, deliberately to be provocative, not realizing,
[23:14] Speaker 2: I think, that this would excite even more market concerns
[23:17] Speaker 2: around debt sustainability. And then he became very upset. when
[23:23] Speaker 2: the central bankers, and in particular the new governor, Emmanuel Moulin,
[23:28] Speaker 2: suggested that this was not really possible, that it would
[23:30] Speaker 2: be a violation of European treaties. Moulin had a quote
[23:35] Speaker 2: in the Financial Times where he said, I'm worried that
[23:38] Speaker 2: France would be strangled by its debt if it doesn't
[23:40] Speaker 2: take action to adjust fiscally. And Mélenchon was furious that
[23:45] Speaker 2: the governor dared making a reference about France being strangled
[23:50] Speaker 2: by the markets and thought this was an act of betrayal.
[23:53] Speaker 2: And he actually threatened in a tweet, he threatened the
[23:57] Speaker 2: governor of a trial for high treason. So, you know,
[24:01] Speaker 2: things got pretty agitated and heated. But I think they
[24:05] Speaker 2: exposed the fact that I think Mélenchon' s line is that
[24:08] Speaker 2: he's the force that is going to stand to the
[24:11] Speaker 2: dark forces of markets. And I think this is where
[24:15] Speaker 2: we may have a problem, because if, which I think
[24:18] Speaker 2: is actually likely, Mélenchon is in the second round, and
[24:23] Speaker 2: if Mélenchon, which I think is very likely too, does
[24:26] Speaker 2: very well in the legislative election, we could end up
[24:30] Speaker 2: in a situation where Le Pen has won the presidential election,
[24:34] Speaker 2: but the parliament, very much like it was after the
[24:37] Speaker 2: snap election in 2024, is dominated by the left in general,
[24:42] Speaker 2: but the left itself being dominated by Mélenchon, we could
[24:45] Speaker 2: be in a pretty ungovernable situation, or at least a
[24:48] Speaker 2: situation that would require some kind of compromise between the
[24:52] Speaker 2: far left and the far right. And given what I've
[24:55] Speaker 2: said earlier, it's really hard to see how that compromise
[24:59] Speaker 2: emerges without a much more adult discussion around fiscal policy,
[25:04] Speaker 2: which I think we've failed to have in France for
[25:07] Speaker 2: quite a while.
[25:08] Speaker 3: Maybe this is a good point to ask about the
[25:11] Speaker 3: French bank. So in Eurozone crisis 1.0, and I'm hoping
[25:16] Speaker 3: no more numbers come after that, but in the original
[25:18] Speaker 3: Eurozone crisis, one of the worries was we got this
[25:22] Speaker 3: sovereign bank doom loop, basically. So, you know, government bonds
[25:26] Speaker 3: would sell off. European banks held a lot of those
[25:30] Speaker 3: European government bonds and then they would take losses and
[25:33] Speaker 3: then weakened banks wouldn't be able to lend. And then eventually,
[25:37] Speaker 3: you know, maybe those banks would have to get bailed
[25:40] Speaker 3: out by a sovereign, which was already having budgetary pressures
[25:44] Speaker 3: of its own. What's the case or what is the
[25:47] Speaker 3: current state of French banks? Because I see You know,
[25:50] Speaker 3: I get a lot of random analyst notes. I have
[25:52] Speaker 3: a lot of French banking analysts who are currently sending
[25:55] Speaker 3: things saying French banks are well capitalized. I also saw
[25:58] Speaker 3: something interesting, which is that spreads on French bank debt
[26:02] Speaker 3: were actually tighter than spreads on the sovereign recently, which
[26:07] Speaker 3: is something that you don't see every day. How can
[26:10] Speaker 3: we categorize the French banks here?
[26:12] Speaker 2: So the French banks, in comparison, say, to Italian banks
[26:17] Speaker 2: or to Spanish banks, have relatively little government debt. So
[26:23] Speaker 2: if they were to increase their government debt exposure, they
[26:27] Speaker 2: could do that pretty meaningfully and still stay within the
[26:31] Speaker 2: bounds of what Italian or Spanish banks do. They have
[26:35] Speaker 2: a bit less debt than they did during the euro crisis,
[26:39] Speaker 2: at the peak of the euro crisis, but not so
[26:43] Speaker 2: few compared to that. So essentially, French debt could increase
[26:46] Speaker 2: their exposure to stabilize a bit the market and basically
[26:51] Speaker 2: reach the peak that they reached in 2011, 2012. And
[26:55] Speaker 2: if they wanted to go very far and go as
[27:00] Speaker 2: much as the Italian banks, they would have a lot
[27:02] Speaker 2: of space, as much as you know, 300 to 400
[27:05] Speaker 2: billion of space to do that. So I don't think
[27:09] Speaker 2: we're in a situation where there is a very active
[27:12] Speaker 2: doom loop between the French OAT exposure and the French banks.
[27:16] Speaker 2: If you remember, you know, what you said about the
[27:19] Speaker 2: euro crisis in 2020, 2011, the moment where there was
[27:22] Speaker 2: an acute stress in the French banking system, which actually was,
[27:26] Speaker 2: I think, a very critical moment in the summer of 2011,
[27:28] Speaker 2: where the crisis stopped being a crisis of the periphery
[27:33] Speaker 2: and really became a crisis of the core of Europe.
[27:36] Speaker 2: And I think it is, in large part, why Mario
[27:39] Speaker 2: Draghi in the summer of 2012 did his famous announcement
[27:44] Speaker 2: is because the crisis was moving from the periphery to
[27:47] Speaker 2: the core, but it was not so much because of
[27:49] Speaker 2: the doom loop at the time in the strict sense,
[27:52] Speaker 2: It was because the French had a lot of liabilities
[27:57] Speaker 2: and dollars. And in the summer of 2011, essentially the U.S.
[28:01] Speaker 2: money market mutual funds stopped financing the European banking system
[28:05] Speaker 2: and in particular the French banking system. So basically what
[28:08] Speaker 2: really created the crunch on the French banks in the
[28:11] Speaker 2: summer of 2011 was the scramble for dollars. we're not
[28:15] Speaker 2: in that situation today. And so I'm less worried about
[28:20] Speaker 2: a sovereign bank doom loop now than I would have been,
[28:24] Speaker 2: you know, 10, 15 years ago.
[28:41] Speaker 1: Can you explain maybe to our listeners who like, Maybe
[28:45] Speaker 1: they're young. They don't remember 2011, 2012, and so forth.
[28:49] Speaker 1: Can you explain why, in the current environment, it's not
[28:54] Speaker 1: as easy for the ECB to sort of put a
[28:57] Speaker 1: cap on spreads the way it might have been in
[29:00] Speaker 1: Draghi's time?
[29:01] Speaker 3: All they have to do is say whatever it takes, right?
[29:03] Speaker 3: Those are the magic words.
[29:05] Speaker 1: Yeah, why can't they do that this time?
[29:06] Speaker 3: Just say it.
[29:07] Speaker 2: No, it's a very important question because, in fact, we
[29:12] Speaker 2: ended the euro crisis because with effectively, without really saying it,
[29:17] Speaker 2: a new architecture for the euro area. We essentially departed
[29:22] Speaker 2: from the architecture that was written in the Maastricht Treaty
[29:26] Speaker 2: to a new architecture that emerged because a few things
[29:30] Speaker 2: were added to the euro of the Maastricht Treaty. And
[29:33] Speaker 2: these few things were essentially a backstop that allowed to
[29:38] Speaker 2: lend to governments, You remember when the euro crisis started,
[29:42] Speaker 2: there were a lot of people who said it's actually
[29:44] Speaker 2: a violation of the treaty to provide financial assistance to
[29:47] Speaker 2: another euro area member state. So we created first the FSF,
[29:50] Speaker 2: the FSM, and then the ESM, which actually was kind
[29:54] Speaker 2: of a, you can view it as a European version
[29:56] Speaker 2: of the IMF, which is basically allowed to lend to
[30:01] Speaker 2: countries against an adjustment program. We completed the euro area
[30:07] Speaker 2: with what we call the banking union. So essentially a
[30:09] Speaker 2: single supervisor for banks and in principle, a single resolution
[30:15] Speaker 2: authority precisely to break the doom loop that Tracy referred
[30:20] Speaker 2: to between banks and sovereign. And finally, and maybe most importantly,
[30:25] Speaker 2: we accepted, without really saying it in so many words,
[30:28] Speaker 2: but we accepted that the central bank could be called
[30:32] Speaker 2: upon to be a lender of last resort in situations
[30:35] Speaker 2: of crisis. And I think what we left Europe with
[30:40] Speaker 2: or the euro area with at the time is the
[30:43] Speaker 2: impression that we had solidified, we had kind of buttressed
[30:46] Speaker 2: the architecture of the euro area and that now we
[30:48] Speaker 2: are more robust to crises, which I think is true.
[30:52] Speaker 2: That being said, there are some important political conditions attached
[30:56] Speaker 2: to that. And these conditions are that we are lending
[31:00] Speaker 2: to countries against a fiscal adjustment program. This was the
[31:04] Speaker 2: case with most of the countries we referred to. And
[31:09] Speaker 2: even the activation of what was called at the time
[31:11] Speaker 2: the OMT announced by Draghi was supposed to be only activated...
[31:16] Speaker 2: if a country had an ESM program. So basically what
[31:19] Speaker 2: the ECB was effectively saying is, I'm prepared to backstop markets.
[31:23] Speaker 2: I'm prepared to move markets away from a bad equilibrium
[31:26] Speaker 2: towards a good low interest rate equilibrium, provided you're delivering
[31:32] Speaker 2: on your part of the job, which is to basically
[31:33] Speaker 2: deliver a sound and credible fiscal path. The problem we
[31:38] Speaker 2: have today is that we have no signs that France
[31:43] Speaker 2: is prepared to deliver on a sound fiscal path. And
[31:46] Speaker 2: I think as a result of that, it's very unlikely
[31:49] Speaker 2: that the ECB can step in. I think the ECB
[31:52] Speaker 2: would have all the power in the world to basically
[31:54] Speaker 2: stabilize French debt in a heartbeat. The difficulty is that
[31:58] Speaker 2: in order to do that, it needs to see France
[32:01] Speaker 2: taking credible long-term steps to consolidate its public finances. And
[32:06] Speaker 2: for the reasons that we've talked about before, it's hard
[32:09] Speaker 2: to see how politically that can be delivered.
[32:11] Speaker 1: Yeah, I was just going to say, Tracy, this is
[32:14] Speaker 1: the core thing. It's like, okay, we'll backstop your debt
[32:17] Speaker 1: if you do this fiscal consolidation. If they could do
[32:19] Speaker 1: the fiscal consolidation, we wouldn't be talking about this, period.
[32:23] Speaker 1: So it's like, that's the whole ballgame here. And maybe
[32:27] Speaker 1: like in 2011, because things were so dire, it's like, OK,
[32:30] Speaker 1: there was a perception that governments would. But obviously, if
[32:33] Speaker 1: the political will were existed to do that, then we
[32:36] Speaker 1: wouldn't even be having this conversation. It's a catch-22.
[32:38] Speaker 3: It's a catch-vendeur.
[32:41] Speaker 1: Yeah, exactly.
[32:42] Speaker 2: It is indeed. But, you know, I think all of
[32:45] Speaker 2: these countries in the euro area which had to go
[32:47] Speaker 2: through a very tough fiscal adjustment– you know, didn't really,
[32:51] Speaker 2: you know, choose it. They were kind of, you know,
[32:54] Speaker 2: compelled to by a combination of market forces and political
[32:59] Speaker 2: forces in Europe. And I think it's very difficult to
[33:03] Speaker 2: explain to these countries that things are going to be
[33:05] Speaker 2: very different for France. So my sense is politically, it's
[33:10] Speaker 2: very difficult for a German chancellor to allow the ECB
[33:15] Speaker 2: to backstop French debt without a severe political cost domestically.
[33:21] Speaker 2: And so I think there is, you know, a difficult
[33:23] Speaker 2: intra-European political game here. You know, remember that, you know,
[33:28] Speaker 2: the biggest threats to the German chancellor today is the
[33:31] Speaker 2: rise of the IFD. The IFD was founded as an
[33:35] Speaker 2: anti-Euro party, precisely opposing these fiscal, these rescue programs in
[33:43] Speaker 2: Greece and others. It has moved since. This is no
[33:48] Speaker 2: longer a party that is primarily focused on the euro
[33:50] Speaker 2: and it's primarily focused on immigration. But I think for Germany,
[33:54] Speaker 2: providing a free backstop to France by way of the
[33:58] Speaker 2: ECB is the surest way to increase political support for
[34:03] Speaker 2: the AfD, and that's probably not something that this German
[34:07] Speaker 2: chancellor can underwrite. So I think we are in a
[34:10] Speaker 2: difficult bind, and the ECB, as usual, is in the
[34:14] Speaker 2: middle of that political bind.
[34:16] Speaker 3: Can we talk about your time as an advisor to
[34:19] Speaker 3: Macron a little bit more? So when I think about
[34:22] Speaker 3: ways for governments to raise money in perhaps a politically
[34:28] Speaker 3: palatable way, One of those, I would think, would be
[34:32] Speaker 3: something resembling a wealth tax, right? Like, you don't want
[34:36] Speaker 3: to impose heavier taxes on a bunch of French citizens,
[34:40] Speaker 3: the majority of French citizens and workers who are already
[34:43] Speaker 3: protesting in the streets. But maybe you could raise taxes
[34:48] Speaker 3: on the wealthy, right? And maybe that would be a
[34:50] Speaker 3: politically popular way to raise revenue for the government. And
[34:54] Speaker 3: yet Macron famously got rid of France's wealth tax. Can
[34:59] Speaker 3: you explain the thinking behind there and if the wealth
[35:03] Speaker 3: tax could ever come back?
[35:04] Speaker 2: So that takes us a long way back to 2016,
[35:07] Speaker 2: where I was with a few others indeed advising his campaign.
[35:11] Speaker 2: And I disagreed with him precisely on that. So, you know,
[35:15] Speaker 2: I thought abolishing the wealth tax was a very bad idea.
[35:20] Speaker 2: both symbolically, but also economically. I didn't think it was
[35:25] Speaker 2: a good idea to have a less progressive tax system.
[35:28] Speaker 2: And I think that costed Macron a lot politically because
[35:31] Speaker 2: from that point onwards, he was viewed as or painted
[35:36] Speaker 2: as the president of the rich. And I think that
[35:38] Speaker 2: undermined a lot of his reform efforts after that. I
[35:41] Speaker 2: think he had a very good pension reform in his
[35:45] Speaker 2: program in 2017 that he was never able to pass.
[35:47] Speaker 2: I think in part because Because I think from that
[35:50] Speaker 2: point onward, he was tainted with the suspicion of serving
[35:55] Speaker 2: the interest of the rich. So I think that was
[35:59] Speaker 2: a mistake. And indeed, I think now there is no
[36:03] Speaker 2: way of consolidating public finances without restoring some form of
[36:08] Speaker 2: a wealth tax. At minimum, we will return to the
[36:11] Speaker 2: wealth tax that we had in 2017 when Macron arrived.
[36:17] Speaker 2: But more certainly, we will do more than that. And,
[36:20] Speaker 2: you know, France has been really, the French political debate
[36:24] Speaker 2: around wealth tax has been really framed by Gabriel Ducman,
[36:28] Speaker 2: who is a French economist who is also very influential
[36:31] Speaker 2: in the U.S. debate and in the current Californian referendum
[36:35] Speaker 2: around taxing billionaires. And he's proposing a very aggressive version
[36:40] Speaker 2: of the original French wealth tax. I doubt that we
[36:45] Speaker 2: will go as far as the Zucman tax. In fact, interestingly,
[36:50] Speaker 2: even Jean-Luc Mélenchon, who is advocating for a wealth tax
[36:54] Speaker 2: of his own, has not referred or embraced fully the
[36:58] Speaker 2: Zucman tax. But I think the wealth tax is an
[37:02] Speaker 2: inevitable part of the adjustment process, as well as I
[37:06] Speaker 2: think pension reform is an inevitable part of the adjustment
[37:10] Speaker 2: process on the spending side. And so I think we
[37:13] Speaker 2: have these two sacred cows that we'll probably have to
[37:17] Speaker 2: sacrifice in order to deliver any meaningful adjustment over the
[37:19] Speaker 2: coming years.
[37:20] Speaker 1: We hear a lot about, I guess, the sort of
[37:23] Speaker 1: China trade question in the context of Germany, and that's
[37:26] Speaker 1: huge there. What is the version of that in France
[37:29] Speaker 1: these days? And how much similar anxiety is there about,
[37:32] Speaker 1: I guess, French industrial giants, et cetera, and their own
[37:35] Speaker 1: exposure to surging Chinese exports of higher value, added value goods?
[37:41] Speaker 2: It's a very good question. So the second China shock
[37:43] Speaker 2: has been something that the French policy circles have worked
[37:48] Speaker 2: on a lot. And I think they have slowly managed
[37:51] Speaker 2: to convince Germany that this was a real issue that
[37:54] Speaker 2: Europe should act upon. There was a very important Franco-German
[37:58] Speaker 2: non-paper on this a week ago, which I think, you know,
[38:02] Speaker 2: sort of crystallized this movement of Germany. And there was
[38:04] Speaker 2: over the last weekend a deal between the trade commissioner
[38:08] Speaker 2: and China, which I think speaks to that willingness of
[38:12] Speaker 2: Europe to use more aggressively its trade defense instruments. But
[38:15] Speaker 2: economically speaking, I would say France is a lot less
[38:18] Speaker 2: exposed than Germany is. To some extent, deindustrialization has occurred
[38:25] Speaker 2: in France already. It is occurring now in Germany. And
[38:29] Speaker 2: so to some extent, this is a fight that France
[38:32] Speaker 2: has already lost. France is a lot more than Germany,
[38:36] Speaker 2: fundamentally a service-based economy. The one worry I think that
[38:41] Speaker 2: France rightly has is is in the aeronautical business, which
[38:47] Speaker 2: remains a very important French export, and one where China
[38:52] Speaker 2: is not yet competing, but where it might. The days
[38:58] Speaker 2: where the Chinese can produce the equivalent of an Airbus
[39:02] Speaker 2: A320 are going to be dark days for Europe and
[39:06] Speaker 2: for France. And so I think the worry, even though
[39:09] Speaker 2: for the auto sector, which is at the heart now
[39:12] Speaker 2: of the fight, you know, there's not a, you know,
[39:15] Speaker 2: a central concern for France, the worry is that, you know, that,
[39:18] Speaker 2: you know, moves an entire industrial landscape in Europe that
[39:22] Speaker 2: could end up, you know, being pretty detrimental to France too.
[39:25] Speaker 3: So in classic debt crises, you often need some sort
[39:29] Speaker 3: of circuit breaker to put a stop to the dynamics
[39:33] Speaker 3: that are making debt deteriorate and then everyone getting more
[39:36] Speaker 3: worried and then the debt deteriorates further, etc. With the
[39:40] Speaker 3: original Eurozone crisis, that was the ECB's famous whatever-it-takes statement.
[39:46] Speaker 3: What do you see as the most likely circuit breaker
[39:49] Speaker 3: for this particular French entanglement?
[39:52] Speaker 2: I think we will need two things. One is we
[39:56] Speaker 2: will need to have some national consensus emerging on fiscal policy. And,
[40:03] Speaker 2: you know, I said some critical words earlier about the
[40:06] Speaker 2: German dead break, and I stand by that. I think
[40:09] Speaker 2: the German dead break was poorly designed. But I think
[40:13] Speaker 2: the good thing that Germany has created was a national
[40:16] Speaker 2: consensus on fiscal policy. And it has even now, after
[40:21] Speaker 2: this election, actually called upon a commission of experts to
[40:26] Speaker 2: try and design the new German fiscal rule. So I
[40:29] Speaker 2: think France would need something different. to that effect. Essentially,
[40:34] Speaker 2: Macron calling on all the political parties to nominate one
[40:39] Speaker 2: or two experts, and for these experts to agree on
[40:42] Speaker 2: a consensual debt rule for the next decade. I think
[40:47] Speaker 2: we need that kind of political commitment as a first
[40:51] Speaker 2: circuit breaker. And I think once we have that, the
[40:55] Speaker 2: second circuit breaker is easier to activate. And that's essentially...
[40:59] Speaker 2: The ECB, either the OMT, so that takes us back
[41:02] Speaker 2: to the framework that you've described during the euro crisis,
[41:06] Speaker 2: so essentially some kind of an ESM-like program with OMT interventions,
[41:12] Speaker 2: or because there has been a new instrument invented by
[41:16] Speaker 2: the ECB since, and that has never been used, the
[41:20] Speaker 2: transmission policy instrument, TPI, which can be activated without a program.
[41:26] Speaker 2: And I tend to think that this is a more
[41:28] Speaker 2: desirable outcome, but it can only be activated if the
[41:33] Speaker 2: country in question is deemed compliant with the European fiscal rules.
[41:38] Speaker 2: And in order to be compliant with the European fiscal rules,
[41:41] Speaker 2: you essentially need what I've described above, which is a
[41:45] Speaker 2: political commitment and the political capacity to commit to a
[41:49] Speaker 2: fiscal adjustment that is credible over the medium term. So
[41:52] Speaker 2: I think the building blocks... for solving this crisis are
[41:57] Speaker 2: within reach. And at the same time, I struggle to
[42:02] Speaker 2: see how they happen on this side of the French elections.
[42:07] Speaker 2: And so it's both, you know, on the horizon. And
[42:10] Speaker 2: at the same time, I struggle to see a catalyst
[42:12] Speaker 2: now to make the situation better.
[42:15] Speaker 1: Jehanne Vallée, thank you so much. That was an excellent
[42:18] Speaker 1: description of what's going on. Really appreciate you coming on Oblots.
[42:21] Speaker 1: Maybe we'll talk again around election season.
[42:25] Speaker 2: Thank you.
[42:25] Speaker 1: Pleasure. I thought he was great. We covered a lot
[42:40] Speaker 1: of ground.
[42:40] Speaker 3: Yeah, we really did.
[42:41] Speaker 1: You know, I really do think the core thing is
[42:44] Speaker 1: that catch-vendue that you identified, or I guess that I
[42:49] Speaker 1: identified and you identified as a catch-vendue. It's like, yes,
[42:53] Speaker 1: you can have a bailout in exchange for fiscal consolidation.
[42:57] Speaker 3: In exchange for fixing the problem that is necessitating the bailout.
[43:00] Speaker 1: But if you were going to fix the problem, you
[43:02] Speaker 1: wouldn't have needed the bailout in the first place. And
[43:04] Speaker 1: so it seems like a real pickle, to say the least.
[43:07] Speaker 3: It does indeed. I mean, the other thing I keep
[43:10] Speaker 3: thinking is there's there's a few ways to get out
[43:13] Speaker 3: of a debt crisis, right? I think the one that
[43:15] Speaker 3: everyone would prefer is to grow your way out of it.
[43:18] Speaker 3: That seems like a long shot in the case of France.
[43:21] Speaker 3: The other way is through fiscal austerity, which as we
[43:24] Speaker 3: discussed is politically unpopular. Financial repression, which we kind of
[43:29] Speaker 3: touched on with the idea of canceling out some of
[43:32] Speaker 3: the bonds owed to the ECB. You know, that might
[43:36] Speaker 3: be a viable option for a place like France, especially
[43:39] Speaker 3: if French banks currently don't hold that much French debt
[43:42] Speaker 3: is kind of risky, but it could happen. You can
[43:44] Speaker 3: inflate your way out of debt.
[43:46] Speaker 2: Yeah.
[43:46] Speaker 3: I feel like sort of all of these are on
[43:49] Speaker 3: the table, except maybe serious fiscal austerity.
[43:54] Speaker 2: I don't know.
[43:54] Speaker 1: Everyone wants a trick, you know, everyone. And arguably, look,
[43:59] Speaker 1: someone will get mad at me about saying this, but
[44:01] Speaker 1: like arguably even like I think the obsession is not
[44:06] Speaker 1: a wealth tax per se. Actually, I think a wealth
[44:08] Speaker 1: tax in general is. So in the West, where there
[44:12] Speaker 1: is such extreme inequality and so many people have made
[44:16] Speaker 1: their money thanks to asset prices and incomes, we're going
[44:21] Speaker 1: to at some point, I feel like there has to
[44:22] Speaker 1: be more discussion about that. I do think like I'm
[44:25] Speaker 1: sort of skeptical that the whole thing can just be
[44:28] Speaker 1: solved by like we're going to tax billionaires more, etc.,
[44:31] Speaker 1: because we would all like to imagine that that would
[44:34] Speaker 1: be enough because most of us aren't billionaires, etc., I
[44:37] Speaker 1: presume it's all very tricky. What's shocking to me is,
[44:43] Speaker 1: I don't know if it's the Overton window or whatever,
[44:46] Speaker 1: but I do remember the 2002 Prime Minister, Lionel Jospin,
[44:51] Speaker 1: losing in the first round runoff to Jean-Marie Le Pen.
[44:55] Speaker 1: And that was just like such an earthquake and obviously
[44:58] Speaker 1: a sign of things to come politically in Europe.
[45:00] Speaker 2: Yeah.
[45:00] Speaker 1: And now the idea of like, well, if only we
[45:03] Speaker 1: could get his daughter Maureen Le Pen in and a
[45:06] Speaker 1: stable assembly for her, then we could get like that.
[45:10] Speaker 1: She's like firmly within the sort of like normie politics now,
[45:14] Speaker 1: which probably speaks to some moderation on her part of
[45:19] Speaker 1: the Le Pen family's ideology, but also just like how
[45:21] Speaker 1: much has changed that if the sort of Le Pen
[45:24] Speaker 1: Maloney style politics like that would be very like acceptable
[45:28] Speaker 1: as opposed to investors at this point.
[45:31] Speaker 3: Can I say one thing about the wealth tax?
[45:32] Speaker 2: Yeah.
[45:33] Speaker 3: You could imagine in a world where AI does more
[45:37] Speaker 3: and more of the work, that it's going to be
[45:40] Speaker 3: harder for governments to get money out of taxing labor.
[45:44] Speaker 2: Yeah. Right? No, it's going to be a huge deal.
[45:46] Speaker 3: In which case, you have to tax the capital because
[45:48] Speaker 3: the capital is the one generating all the wealth. So
[45:51] Speaker 3: I feel like that's going to be I mean, it
[45:54] Speaker 3: already is a subject for serious conversation, but perhaps even
[45:57] Speaker 3: more so in our AI-powered future.
[46:00] Speaker 1: Yeah.
[46:01] Speaker 3: Anyway.
[46:01] Speaker 1: Anyway, great conversation. I'm glad we did it.
[46:04] Speaker 3: Should we leave it there?
[46:05] Speaker 2: Let's leave it there.
[46:06] Speaker 3: This has been another episode of the OddLots podcast. I'm
[46:09] Speaker 3: Tracy Allaway. You can follow me at Tracy Allaway.
[46:12] Speaker 1: And I'm Joe Weisenthal. You can follow me at The Stalwart.
[46:14] Speaker 1: Follow our producers, Carmen Rodriguez at Carmen Ehrman, Dashiell Bennett
[46:18] Speaker 1: at Dashbot, Kale Brooks at Kale Brooks, and Kevin Lozano
[46:21] Speaker 1: at Kevin Lloyd Lozano. And you can chat about all
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[47:01] Speaker 3: Thanks for joining.
[47:19] Speaker 1: Thank you.

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