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. We 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 government 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-22.
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
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. The last thing we need is to be talking about European bond spreads yet again.
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, it seems a little quaint in the sense of like, okay, there is these spreads in Greece, etc., then it was kind of solvable. Mario 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 seemed 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 have recovered enormously. And 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, the goat.
Oh, goat, like, oh, G.O.A.T.
Yeah, that's good. I like oats.
Okay, let me do something easier. French bond yields are out of control.
There we go. That's a good one.
I definitely, the good thing about it being France is that you have a lot more opportunities to make puns.
That's right. We're going to have, we should have plenty of opportunities.
I used to speak French, by the way, and then I forgot it. You know, the first Greek, 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, etc. Portugal had some dicey moments, etc. This is like much different. And as you're right, like the country that everyone is homed in on is France right now for Europe, a lot 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 concerns or deficit concerns, but also like there are some like deep political concerns.
Yeah, 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. And I think they're worried about, like, who's going to be, who's going to be running the country. And so 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 yeah, you just, I don't think France has run a budget surplus for the entirety of our lives. Like this has been, 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, so even though we would probably, we do not need another euro crisis right now, and we have no choice, we have to talk about what's going on. And we really do have the perfect guest. We're going to be speaking with Shahin Vallée. 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 guy. So Shahin, thank you so much for coming on the podcast.
Thank you for your invitation.
Why don't you give us a little bit of background? Tell us about the time when you, when you were an advisor to current President Emmanuel Macron. What capacity was that? What role was he in at that time? Give us, what were you, what were you doing for him?
So I first met Macron in 2012. I had just joined the cabinet of Herman Van 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 Van Rompuy, working 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 was also, which also coincided with the end of the mandate of Rompuy, I joined him in Paris and 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. This was just a few months before Syriza in Greece got to power. And I actually knew Varoufakis from a previous life. And I actually introduced Emmanuel Macron. Both 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 hand. And then the rest is history. But 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 some, for instance, around, you know, what can we or cannot do with France, really remind me of some of the arguments that Varoufakis was making at the time and that he sort of, you know, went headfirst in a confrontation with the Eurogroup first and then with the ECB, which ended pretty badly. And I worry that people from La France Insoumise have not learned that lesson and may be heading for the same confrontation. I doubt, you know, Jean-Luc may not, 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.
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? And 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?
I think they're worried about French debt not because there is anything new about fiscal policy. You know, the budget that was announced was 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 hand and on the other some sort of centrist candidate emerging. You know, it was not clear who, but, you know, Philippe was probably the best positioned 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 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. And, you know, one could think that, you know, the polls are so clear about the fact that Marine Le Pen is going to win if she is in a runoff versus Mélenchon, so, 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, a general election. The 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 minds, 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. And 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 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, you know, doubts about passing every budget since. And I think, you know, 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. And 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 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, essentially a center-right to far-right government that has to be fairly pro-European and has to be fairly compliant with European fiscal rules. I think that scenario of the Meloni-like transition is slowly being deprived. 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. They 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. So I think there are several reasons why 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.
This is such a great answer because you kind of perfectly anticipated where I was going, which is, you know, if we went back 10 or 15 or I guess like 25 years ago when, you know, Le Pen's father and the thought that like he would make the runoff, etc., was just like such a shock to all of Europe. I forget who he was running against in 2002, against Chirac in 2002. And that was like such a shock. And now, as you describe it, it's like, okay, like markets are sort of cool with the idea of like these Le Pens coming in. And I was unclear whether it's just, has the Overton window shifted? Has 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 a sort of centrism anymore?
No, I don't think France is unique. You know, I think I've said before that Emmanuel Macron would sadly be our Renzi in Italy, you know, kind of the last force of the center who's trying to hold the center together and who eventually fails to do so. And so very much like Renzi is leaving the center. And by that I mean both the center-left and the center-right 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 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, polarized politics in France in particular, where 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? Because 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 have been different views expressed by the Rassemblement National on its fiscal policy. I think there's been a turn that was initiated by then-Bardella, which was to basically make the party or the political line a lot more fiscally orthodox. And 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 the 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 institute, to introduce in the French constitution by way of a referendum. And 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, you know, 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 that debt is not brought back to 60%. So 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 or recession, a war, an energy crisis. And that can only be done for two years. Otherwise it has to be approved by referendum. So it's, you know, she's setting the bar in terms of fiscal orthodoxy even higher than the German debt brake 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 had 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, and 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 will have to disappoint her electorate by saying, well, my commitment to fiscal orthodoxy means we have to, you know, put the pension age back to 65 or plus, for instance. I think that internal discussion inside the RN 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, you know, 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, but 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 the constitutional rule. They have, you know, different parameters and different preferences, but more or less all agreeing. 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. And 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 Mélenchon, 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 Bank of France or the ECB president around what they're saying around the French fiscal situation. So it could be that, you know, and this is why I was referring to Varoufakis earlier, it could be that, you know, Mélenchon soon becomes our Varoufakis and that he gets some political credit for it.
