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This article has been automatically translated from Dutch. Click here to see the orginal article including all links to sources.
The gold price broke all records this week, while the U.S. stock market took a heavy hit. Investors are flocking en masse to safe havens. We are now seeing a small correction—will the gold rally continue? Following our podcast on a new Eurozone crisis, we also delve into France. Why must France urgently reform, and why is it failing to do so? Read on!
In this week’s podcast, we spoke with Martin Visser, Chief Economics Editor of De Financiële Telegraaf, about a possible new European debt crisis. But what about the Southern European countries? Why can’t they get their public finances under control? Why does France have such a massive national debt, and why does there seem to be no solution for its persistent budget deficit?
This week, the French weekly Le Point published a very insightful article by economist François Facchin on this topic. Let’s start by sketching the issue through the lens of French government spending relative to the size of the economy.
Government spending relative to GDP (source: IMF)
In France, government spending accounts for 57 percent of GDP—the highest in Europe if we exclude war-torn Ukraine. Globally, this figure is only exceeded by a few small island nations. For comparison, the ratio is about 43.5 percent in the Netherlands and around 34.4 percent in the United States. But what does this mean in practice?
François Facchin writes that today, 30 million people in France “live off the state,” relying on government support. This includes retirees, the unemployed, civil servants, and those receiving welfare or disability benefits. These groups now make up 44 percent of the population—a significant increase from under 30 percent in 1989. This puts an increasingly heavy burden on public finances and the shrinking segment of the population that is footing the bill.
For instance, the ratio between contributors and retirees has worsened over the years. In 2005, there were still 2.02 contributors per retiree; by 2022, that had fallen to 1.77. France operates a full pay-as-you-go pension system. Unlike in the Netherlands, no capital is built up and invested; instead, current workers fund the pensions of current retirees. The bulk of pension payments is thus financed directly by a steadily shrinking group—just as aging is set to accelerate in the coming years.
Many of these costs are currently being covered by a growing national debt and a budget deficit of around 6 percent. This weighs heavily on the country’s economic growth. Reform is necessary, but very difficult in France due to high resistance. François writes that removing the barriers to economic growth would benefit all French citizens in the long run—including those now opposed to reform.
Sixty percent of eligible voters fall into the group dependent on public funds. In the short term, they benefit from maintaining the status quo. Those living off taxes or social benefits view any budget cuts as immediate losses, often ignoring long-term gains. This creates a serious political barrier to reform. This group is well organized compared to young people and entrepreneurs. You may recall the massive protests against Macron’s pension reforms in 2023.
French President Emmanuel Macron (source: kremlin.ru / Wikimedia Commons)
François sees a significant political risk of a gerontocracy combined with paralyzing bureaucracy. Thirty percent of voters are retired, and 18 percent are on the public payroll. He argues that it’s crucial to mobilize all active workers and younger generations to form a counterforce capable of restoring the foundations for economic growth. This includes policies aimed at reducing government spending and lowering the tax burden.
The Netherlands’ agreement to “temporarily” abandon the EU’s budget rules certainly doesn’t help. It reduces the pressure on France to push through reforms. Macron recently declared in a speech that the European budget rules have become obsolete—a statement that, in light of the above, becomes much easier to understand.
While France does not (yet) have a Milei-style chainsaw movement, something similar may be budding. More and more young people are struggling with the current social contract and high tax burden. If you’re curious, look up the phrase “C’est gratuit, c’est Nicolas qui paie” and check out the fast-growing X account by the same name. “Nicolas” represents a young, working Frenchman increasingly burdened with paying for pensions and social benefits.
Meanwhile, the gold price continues its quiet ascent. This week, the gold price in dollars rose above $3,150 per troy ounce for the first time, and for the first time in history, a kilo of gold surpassed the $100,000 mark. In euros, too, we hit a new record. This week, a kilo of gold cost (well) over €93,000 for the first time. Although a small correction has since occurred, the trend remains clear.
Gold price as of Friday afternoon, April 4 (source: Holland Gold)
The Financial Times reports that investors are rushing into gold due to uncertainty and fears surrounding U.S. developments related to Trump’s proposed import tariffs. The British business paper notes that investors are seeking safe havens, leading to the largest inflow into gold funds since the start of the pandemic. Government bond prices also rose (causing yields to fall), and the share of cash in investment portfolios saw its strongest increase in five years.
The S&P 500 dropped 4.8 percent on Thursday. Wall Street lost roughly $2.5 trillion in market value in a single day. Since 1980, there have only been 29 days with even sharper declines. The "Magnificent 7," which we previously discussed, are now 30 percent below their December peak. Apple alone lost $300 billion in value in one day, with a 9.3 percent drop.
Performance of gold, U.S. stocks, and government bonds (source: Financial Times)
If Trump’s intention was to make the dollar cheaper for exports and to lower bond yields ahead of looming debt refinancing, then he’s off to a good start. But Trump’s true intentions and the broader impact of his actions warrant an entire article of their own—for now, we’ll stick to gold.
In the Financial Times article, the authors suggest that the recent gold rally is mainly driven by institutional investors buying gold out of fear and uncertainty over economic and geopolitical developments. But gold analyst Jan Nieuwenhuis suspects that the Chinese central bank is also buying substantial amounts of gold. According to his analysis, China may be purchasing up to five times more gold than officially reported. He estimates that China now holds more than 5,000 tons of gold. He also sees gold taking on an increasingly important role as a reserve asset. Read his full article here.
The role of gold in international reserves is rising again (source: Jan Nieuwenhuis)
Jan Nieuwenhuis sees no end to the gold rally anytime soon. Economist Daniel Lacalle told CNBC he expects the same. He predicts that central banks will continue buying, that supply from gold mines won’t increase significantly anytime soon, and that markets will increasingly see gold (and silver) as a hedge against currency devaluation. Meanwhile, banks are raising their gold price forecasts. According to UBS, a rise to $3,500 per troy ounce is possible this year if tensions and uncertainty persist.
To conclude, an interesting article from earlier this week: Politico reports that the Germans are increasingly concerned about a portion of their gold reserves still stored in the United States. Germany holds the world’s second-largest gold reserves and keeps 37 percent of them—some 1,236 tons worth €113 billion—in the vaults of the Federal Reserve in New York. German lawmakers are now questioning whether the U.S. can still be trusted with Germany’s gold. Several politicians are calling for tighter oversight of Germany’s gold stored abroad. The Netherlands also has substantial gold reserves overseas—in New York, London, and Ottawa. Is it time to bring those back as well?
