France faces 'double whammy' due to student protests demanding improved educational environment and financial instability

(London = Yonhap News) Correspondent Kim Ji-yeon = Students across France are protesting by setting up barricades in front of schools, and in the financial market, national financial instability is being pointed out as the fundamental cause of the stability of French government bonds falling to the lowest level since the European financial crisis.

Students are demanding expansion of manpower and budget to improve the poor educational environment, including chronic teacher shortages, overcrowded classes, and outdated school facilities. The protests, which began in the middle of last month, have spread across the country and intensified, and large-scale protests are scheduled for the 6th (local time).

On the 29th of last month, hundreds of thousands of public sector workers, including firefighters and health workers, staged a street demonstration to protest the decline in purchasing power caused by rising prices and the government's austerity budget plan.

Major unions such as the Confederation of Labor (CGT) and the Confederation of French Labor Democracy (CFDT) are urging teachers to join the student protests, while also planning a general strike against the budget plan.

Last month, fishermen blockaded ports in protest against rising fuel prices and negotiated with the government.

The bond market is fluctuating. All developed country government bonds are shaking due to rising oil prices and inflation concerns caused by the war in the Middle East, but among the seven major countries (G7), French government bonds are experiencing the greatest selling.

As the interest rate on 10-year French government bonds soared to nearly 5%, the highest in over 20 years, the interest rate difference with 10-year German government bonds, a safe asset, widened to 1.6 percentage points, the largest since the 2011 Eurozone fiscal crisis. This leads to a surge in interest and repayment costs, adding to the financial burden.

On the 5th, the value of the euro against the dollar hit its lowest point in 17 months, which was attributed to market concerns about the possibility of France's financial instability reaching the level of a 'financial crisis' and spreading to the euro zone.

French public debt is 3.5 trillion euros (about 5,269 trillion won), which is close to 120% of gross domestic product (GDP). The fiscal deficit has exceeded 5% of GDP for three consecutive years. It is expected to reach 5.4% this year. This is significantly higher than the 3% suggested by the European Union (EU) as the baseline for 2029.

Financial instability and political chaos are in a vicious cycle as both causes and effects of each other.

According to the British Financial Times (FT), French President Emmanuel Macron's pro-business reforms were overturned by large-scale spending to alleviate the impact of a series of crises, and debt increased by more than 1 trillion euros (1,505 trillion won) during his nine years in office.

President Macron set his sights on an early general election in 2024, but as a 'war' over the budget broke out due to extreme divisions in parliament without a majority party, prime ministers resigned one after another.

Prime Minister Sebastien Lecornu included a fiscal savings plan worth 43 billion euros (about 65 trillion won) in next year's budget, including partial tax increases, a partial freeze on civil servant wages, restrictions on pension increases, and a freeze on social welfare spending such as housing support and family allowances.

It is unknown how long it will take for this budget bill to pass.

Not only is it difficult to make spending promises to quell the flood of protests and public dissatisfaction with the current financial situation, but President Macron does not have much momentum to pursue policies at the end of his term.

Jean-Yves Camus, a political scientist at the Jean-Gaulet Foundation, pointed out to the New York Times (NYT) that President Macron is a 'lame duck' and said, "At the end of his administration, it is difficult to see any plans for the next seven months."

Opinion polls predict that Marine Le Pen, a member of the far-right National Rally (RN), will be elected in the presidential election half a year away, and while Jean-Luc Mélenchon, leader of the far-left Unyielding France (LFI), who has even put forth the unconventional claim of 'cancelling the national debt', is also doing well, the centrist camp is struggling.

Alessi Kootenay, head of the international interest rate team at Vanguard Asset Management, warned the FT that 'show-off' pledges from each political party ahead of the first round of the presidential election in April next year could threaten the current government's fiscal soundness plan.

As concerns surrounding France's financial instability grow, speculation about the European Central Bank's (ECB) intervention in the French government bond market is also raising its head.

“This move is not unique to France,” TD Securities wrote in a report last week, adding, “More response from the ECB may be required to help stabilize markets.”

However, some analyzes say that the current situation is not at a stage where there can be talk of a 'financial crisis' or ECB intervention.

Jens Eisenschmidt, a former ECB official and chief European economist at Morgan Stanley, pointed out that the ECB does not favor emergency bond purchases due to political sensitivities and that there is no evidence that the current rise in borrowing costs affects the direction of the ECB's monetary policy.

Emmanuel Moulin, governor of the Bank of France, said in an interview with the FT that although the market turmoil is serious and worrying, he believes the country will get back on track. “France is different from Greece during the eurozone crisis,” he said.

President Moulin also urged smooth progress in financial improvement. “If the government passes its proposed spending cuts and deficit reduction plan, markets can be reassured by concrete commitments to fiscal consolidation,” he said. “If we don’t act now, there is a real risk that we will become increasingly suffocated by rising interest rates.”