The crisis in France will not stay in France. Canada, beware

John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.

What happens in France won’t stay in France. The country, mired in riots and a worsening economic crisis, is but the weak link in a global chain. Although Canada may be spared the worst if a bondfire breaks out, it won’t avoid getting singed by the spreading flames.

At one time during my academic career, I had an annual teaching gig in the south of France. Spring in Provence has its virtues, not least since as a visiting professor I had no administrative or supervisory duties. After a morning seminar, I’d enjoy wine-fuelled “working” lunches in bistros off cobblestoned lanes, then spend the afternoon idling with my notebook in a cafe, nursing pastis. Someone had to do it. And I could see why the French would never want to give up this way of life.

Nobody in my immediate surroundings felt more strongly about this than the charming pensioner in the apartment below mine. He would complain to me – encouraged, no doubt, by my complexion – that the country was so overrun with foreigners, by which he meant Arabs and Africans, that the things that had made France great were getting buried under new flavours, aromas and practices. He was voting for Marine Le Pen’s anti-immigrant party.

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His life and choices embodied the fundamental problem facing France today. Though a pensioner, he was only in his mid-50s, thanks to France’s exceptionally generous pension system. But with people like him spending more of their lives collecting a pension than paying into it, workers needed to be found to fund it. And with the French having small families, that meant immigrants.

So here we are. The French don’t want to give up their pensions, they don’t want to pay the higher taxes needed to sustain them and they don’t want immigrants to do the job for them. Amid this impasse, the country is stuck.

After 2024’s legislative elections, the National Assembly is split into three blocs of about equal weight, with none big enough to direct a legislative agenda. Moreover, they largely refuse to co-operate with each other. Ms. Le Pen’s National Rally, which has roots in France’s fascist past, dominates the right bloc. Jean-Luc Mélenchon’s France Unbowed, which has roots in the country’s long-standing communist movement, dominates the left. Mr. Mélenchon and Ms. Le Pen despise each other, yet both equally despise the centrist bloc of President Emmanuel Macron’s Renaissance party.

This makes it impossible for the government to pass a budget to tackle the country’s worsening deficit. Every time measures are proposed to reduce the deficit, the streets fill with protesters and the opposition capitalizes on the disorder to lambaste the government.

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Nor is there any prospect of an end to this inertia. Polling for next year’s presidential election suggests that in the second stage of the two-round French system – all but the top two candidates are eliminated for the final vote – Ms. Le Pen may face Mr. Mélenchon. Neither offers a plausible path toward deficit reduction and neither, in any event, will likely command a working majority in the National Assembly.

Amid growing anxiety that France is thus headed for a cliff edge with nobody at the steering wheel, investors are dumping French government bonds, driving up their yields. This week, the interest rate on the benchmark 10-year bond went above 5 per cent for the first time in decades.

However, since the drama is unfolding against a backdrop of worsening debt and deficit dynamics across the West, the problem is spreading beyond French borders. As French interest rates rise, investors in other markets with uncertain prospects are selling their holdings to take advantage of the higher French rates: If you’re willing to take risks, better to go where returns are highest. And since the bond market is increasingly dominated by return-seeking hedge funds, rate rises fan out quickly.

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It’s not like there’s a shortage of candidates for where the fire might break out next. Among the G7 economies, both Canada and Germany look to be relatively safe for the moment, with lower debt burdens and deficit projections that look manageable. Britain is a going concern, though, so next week’s budget presentation, the first by the government of Andy Burnham, will be closely scrutinized.

But the massive elephant in the living room is the United States. Despite a national debt that has soared to US$40-trillion and a fiscal deficit that the International Monetary Fund forecasts will reach nearly 10 per cent in the next decade, neither party has a serious plan for deficit reduction. And while U.S. debt was historically seen as a safe port in a storm, investors are growing anxious that things have changed.

In other words, if the situation in France spirals out of control, contagion to the United States can’t be ruled out. And as Canada knows, if the U.S. sneezes …