The IMF Tries to Cover for France

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So what is it: an all-clear signal or a reason for extreme caution? The International Monetary Fund is attempting to play down France’s deteriorating situation amid rising government debt. The IMF’s prescription: growth and fiscal consolidation should heal the patient. How exactly this is supposed to work, however, remains unclear.

Five years ago, a four-decade-long bull market in government bonds came to an end. Since then, investors, major institutional asset managers, and private investors have been slowly but steadily reducing their exposure to government debt issued by heavily indebted nations. France has now been drawn into this sell-off, with government debt at 115 percent of GDP and a budget deficit of 5.7 percent, making it one of the eurozone’s major fiscal problem cases.

A debt restructuring, however, remains politically unthinkable. Our monetary system is an uncovered credit-money system. If credit is eliminated from balance sheets on a large scale, bank balance sheets shrink, and creditors come under pressure. The entire process of credit creation and economic financing freezes.

Then everything collapses like a house of cards. The state apparatus built on cheap credit reveals itself for what it always was: an illusion. It would be an economic nightmare, because it would also expose the supposed omnipotence of central banks as an illusion and reveal that their rescue operations ultimately lead nowhere.

The trend is alarming: France’s long-term interest rates were already trading at around 4.7 percent on Tuesday.

4.7 percent -- debt becomes unsustainable. France is now spending 2.5 percent of GDP, or €77.5 billion, solely on interest payments for past borrowing. The danger is real: If confidence in the creditworthiness of a core eurozone country disappears, the entire financial architecture begins to wobble -- an architecture that fundamentally rests on the creditworthiness of major economies such as the United States, Germany, Japan, and France itself.

Long-term government bonds make up a significant share of the balance sheets of banks, insurers, pension funds, and investment funds. If markets lose confidence in a government’s long-term solvency, the stability of public finances comes under pressure.

The political dream of keeping an all-powerful welfare state alive through monetary expansion is beginning to collapse, leaving behind a severe crisis of confidence.

Eurozone government debt is currently increasing at a rate of four to six percent annually. Europe has taken a fundamentally wrong ideological turn and is now attempting to eliminate the consequences of climate policy and expanding state intervention through the credit machine. Instead, EU countries are sinking deeper and deeper into a downward spiral of declining prosperity, as governments push private initiative, investment, and industrial activity away through regulatory pressure.

For the International Monetary Fund, however, this apparently does not justify panic. On Tuesday, consultations with the French government concluded. The IMF’s assessment of the country’s high fiscal deficits, political paralysis, and a private sector shrinking almost as rapidly as that of its German neighbor apparently gave no reason for alarm.

The IMF’s gentle wording speaks volumes. There is no mention of a crisis. Instead, the Fund praises France’s resilience in the face of numerous shocks, including the recent Iran conflict. The economy has allegedly proven robust, inflation is under control. And even -- remarkably -- financial stability is said to be assured.

Behind this diplomatic rhetoric, however, lies an uncomfortable reality. The IMF itself ultimately calls for fiscal consolidation and points out that France’s deficit must fall below the three-percent threshold by 2029. Necessary measures include spending discipline, structural reforms, and higher productivity -- precisely the core competencies of French, German, and European policymakers in general.

The IMF, however, still operates in a world where market capitalism was at least superficially accepted by the political and media mainstream. In reality, most EU governments are working at full speed to build credit-financed state economies.

The consolidation, productivity gains, and growth demanded by the IMF therefore resemble nothing less than squaring the circle and attempting to override basic economic laws.

Every euro that passes through the hands of government disappears into the bureaucratic abyss or the welfare system -- whether through subsidies, consumer incentives, or political vote-buying. The IMF fails to explain that prosperity and economic progress are ultimately the result of low time preference and private saving. These savings are transformed through free capital markets into private investment -- and from this process of delayed consumption and price-based resource allocation, new factories and technologies emerge.

Perhaps the IMF economists are unfamiliar with this fundamental principle of economics. Given the continued dominance of Keynesian crisis doctrine, however, this would hardly be surprising. The same ideas dominate European politics and continuously whisper the necessity of state intervention into the ears of politicians such as Friedrich Merz and Lars Klingbeil.

Keynes provided the socialists of this world with a pseudo-academic justification that allows them to repeatedly push public finances toward the edge of the abyss while claiming economic legitimacy.

Just weeks ago, the IMF commented on the state of European public finances. Ultimately, its conclusion is always the same: Europe needs growth while simultaneously restoring fiscal order. Budgets must be consolidated, and productivity increased.

The IMF even speaks of austerity. Yet what it avoids addressing are domestic political realities, such as the costly migration crisis, ineffective foreign aid programs, or the enormous financial burden connected to the Ukraine conflict.

How can Germany or France consolidate their budgets without addressing illegal migration? How can fiscal consolidation succeed without ending the Ukraine conflict and reducing the financing of NGOs and questionable development programs?

The IMF remains a soft-spoken lecturer, mixing carefully measured criticism with reassuring optimism. But the eurozone does not need a homeopathic treatment. It needs chemotherapy against the cancer of expanding state economies.

Image: IMF