EXCLUSIVE: Bob Lyddon estimated that a bailout could require £1.7 trillion, warning that the consequences could prove catastrophic for the bloc’s finances.
French President Emmanuel Macron (Image: Getty)
France could require a huge bailout that threatens to overwhelm the European Union’s finances and leave member states liable for trillions of euros in debt, an expert has warned. Financial commentator Bob Lyddon has warned that France’s worsening political and social instability could trigger a crisis in its bond market, potentially forcing Brussels to intervene to prevent a wider financial meltdown.
He said: “France’s political and social situation is now so fragile that financial markets could seize up on their bonds at any moment. The yield on them is now around 4.9% and the highest for 20 years. The yield on French bonds is about 1.5% higher than on German bonds.”
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Mr Lyddon – who outlined his points in an op ed published this week – argued that the European Central Bank’s Transmission Protection Mechanism, designed to address disorderly market pressures on eurozone government bonds, would not provide a solution.
He said: “France, for several reasons, is ineligible to benefit from the Transmission Protection Mechanism, and, given that a bailout package for France would need to be €2 trillion, the other bailout mechanisms with their own legal personality – the European Financial Stability Facility, and the European Stability Mechanism – are not set up to support an operation of that magnitude.”
Instead, he believes the EU itself would have to step in, potentially using an existing financial assistance mechanism and expanding its capacity to borrow.
Mr Lyddon said: “That leaves only the EU itself, which has borrowing powers in case of an emergency: hence the Coronavirus Recovery Fund (now re-named as Next Generation EU).
Prime Minister Andy Burnham (Image: Getty)
“It also has a bailout mechanism already live: the European Financial Stabilisation Mechanism, or EFSM.”
He pointed to the European Commission’s statement that the EFSM “remains in place and can be used if the need arises”, arguing that its lending ceiling would have to be raised considerably to finance a French rescue.
He suggested this could be justified under EU law through emergency powers and approved by qualified majority voting in the European Council, without the European Parliament having a say. That is Mr Lyddon’s interpretation of how such an intervention could be authorised, rather than an agreed EU bailout plan.
The potential scale of the debt is central to his warning. Mr Lyddon said the EU already had more than €1 trillion in debt, potentially reaching €1.2 trillion by the end of 2027, before further borrowing under its next long-term budget.
He said: “Bailing out France would add a further €2 trillion to an EU debt amount already sailing through €1 trillion, well on the way towards €1.2 trillion by the end of 2027, and with plenty of extra programmes on the stocks for its next budget period 2028-34.”
He also argued that EU institutions with their own borrowing powers and separate legal personalities could struggle to survive such a rescue.
Mr Lyddon said they “could hardly survive a bailout of France” and should be folded into the EU itself, adding a further €700 billion to its debts.
His figures suggest a French bailout, combined with existing EU borrowing and the additional liabilities he identifies, could leave the bloc facing a debt burden of around €4 trillion.
However, these are Mr Lyddon’s estimates and predictions, not an official EU forecast. France has not been granted a €2 trillion bailout, and no decision has been announced to merge the EU’s borrowing institutions into the Union.
The warning also carries a political message for Britain, which left the EU in 2020.
Mr Lyddon said: “All the EU’s debts are the full responsibility of EU members, old and new – like the UK, in case Andy Burnham, the Institute for Public Policy Research, or any other cabal of Rejoiners, managed to force us back into it.”
He added: “Taking on liability for €4 trillion of EU debts would be a nice ‘welcome back’ present for us – that is £50,000 for every inhabitant of the UK.”
The UK is not currently liable for EU borrowing in the way a member state is, and any implications of a hypothetical future return would depend on the terms of membership.
Mr Lyddon’s warning comes amid concerns over France’s public finances and political instability. While a sharp deterioration in borrowing conditions could create serious problems for Paris and the wider eurozone, the suggestion that it would trigger the collapse of the EU’s financial structure remains speculative.