French Debt Pile Could Push the ECB to Print More Money

The debt is making headlines again on both sides of the Atlantic. Bitcoin is ready to soar if the Fed and the ECB were to bring back the printing press.

France has no money: an overwhelming debt

The Prime Minister is holding a series of talks this week with political parties to avoid the collapse of his government. The goal is to find common ground to return to a budget deficit below 3% of GDP by 2029.

In the short term, the 6.1% GDP budget deficit must fall to 5% starting in 2024. The budgetary effort required is 60 billion euros, including about 40 billion through public spending cuts.

Over 200 years, France has accumulated a debt of 3,345 billion euros, amounting to 114% of GDP. It increases by about 160 billion per year. Of this grand total, 1,115 billion was accumulated since Emmanuel Macron’s election in 2017.

As a result, interest now accounts for more than 60 billion euros per year. It could become the nation’s biggest budget this year if rates do not fall again.

Problem is, opposition parties are not satisfied with the austerity strategy and plan to overthrow the government in the September 8 vote.

The ECB president warned about the “worrying” risk of a government collapse. The reason being that this will very likely result in a rise in borrowing rates.

France’s 10-year rate is currently around 3.50%, the highest since 2011. It’s as high as Greece. And that despite the ECB having lowered its rates. Its key rate fell from 4.50% in September 2023 to 2.15% today.

Christine Lagarde said she was watching France’s borrowing costs “very closely.” But what could she do if the French government is censured on September 8?

Quantitative Easing in sight?

As a reminder, the ECB holds about 25% of European public debt. It’s 23% in the United States. Yes, the ECB bought a quarter of European public debt through its asset purchase programs.

That means governments no longer pay interest on 25% of their debt. The reason is that the interest received by the ECB is redistributed to national central banks which in turn redistribute it to the States.

Put differently, the US government does not pay 1,000 billion dollars in interest, as often stated, but 750 billion. Same in France. It’s not 67 billion, but rather 50 billion.

Having said that, the question is whether the ECB could restart Quantitative Easing if French rates were to soar? Yes.

Nothing stops central banks from running the printing press. The fact that Donald Trump is attacking the Fed even suggests that this is precisely his ambition. The US 10-year rate is at 4.22%…

But there is no miracle. In the end, easing debt will always result in more inflation if GDP growth does not follow. Allowing States to increase the money supply much faster than economic production will ultimately lead to a general rise in prices.

Thus, increasing productivity (production per person) is difficult in a world past its conventional oil peak (2007). Innovations like AI or quantum computers are full of promise. But while we wait for them to really materialize, the observation is that growth continues to slow down, decade after decade, because of physical limits to growth.

For example, oil production growth went from 7% per year (1900 to 1970) to less than 1% today. While on the other side, the money supply keeps climbing at a much higher pace (~7% per year).

Bitcoin and the arsonist firefighter

It is hard for a government to cut spending. Better to print money. As legendary investor Ray Dalio wrote in June:

When countries have too much debt, lowering interest rates and devaluing the currency that the debt is denominated in is the preferred path government policy makers are most likely to take, so it pays to bet on that happening.

Ray Dalio, billionaire founder of giant investment fund Bridgewater.

And to lower interest rates, you have to print, via “Quantitative Easing.” This is the keyword to watch over the coming months. Especially from May, when Donald Trump replaces the Fed chairman.

Coming to the subject that interests us, yet another Quantitative Easing would be bullish for bitcoin. Historically, all assets rally during these monetary easing periods.

Bitcoin has immediately appreciated a few days ago, after the Fed chairman suggested a possible rate cut, potentially on September 18.

In short, debt puts France and Europe facing a dilemma. Cutting public spending by 40 billion euros, as planned, risks causing social and political tensions, and even more so if François Bayrou’s government falls.

Restarting Quantitative Easing would contain borrowing costs, but it would be an admission of weakness. Moreover, the printing press benefits those rich enough to own prestige real estate, art objects, good stock market deals, etc.

This is why bitcoin will certainly be the big winner if central banks act again as arsonist firefighters. It is the rarest asset in the world while being accessible to all, regardless of the size of one’s savings.

Don’t miss this article on the same subject: Bitcoin: Bitwise’s shocking price prediction.