Add an entry to the list of problems facing French President Emmanuel Macron less than two weeks before pivotal legislative elections: potential financial sanctions by the European Union due to failure to rein in the country’s ballooning deficits and debts.
The reprimand, announced on Wednesday in Brussels, highlighted France’s fragile financial situation at a time of political turmoil in the country, with Marine Le Pen’s far-right National Rally party and the left-wing coalition, the New Popular Front, appearing increasingly in a position to… By forming a new government, Macron’s grip on power may weaken.
Macron threw French politics into chaos earlier this month when he called early parliamentary elections after his party was dealt a heavy blow by the far-right in the European Parliament elections.
The financial warning issued by the European Union authorities paved the way for a possible confrontation between Brussels and Paris. Both the National Rally and the New Popular Front have pledged to spend more on public services at a time when Macron is forced to find deep budget cuts of up to 25 billion euros ($26.9 billion) this year to improve the country’s public finances. But opposition parties are critical of EU institutions and want to ease fiscal policy rather than tighten it.
France’s debt amounts to about 3 trillion euros, or more than 110% of GDP, and a deficit of 154 billion euros, which represents 5.5% of economic output. The budget crisis comes after Mr Macron spent large sums of money to support workers and businesses during pandemic lockdowns. His government also provided subsidies to help households cope with the jump in inflation after Russia’s invasion of Ukraine, which sent energy prices soaring.
EU rules typically require member states to maintain budget discipline or face heavy fines if debt exceeds 60 percent of GDP or if the budget deficit reaches more than 3 percent.
These rules were suspended after the pandemic, when all European governments spent aggressively to protect their economies. But Brussels reinstated it this year and warned high-spending countries to close the gap quickly or face the so-called excessive deficit measure, which forces heavily indebted governments to negotiate with Brussels or potentially face a fine.
France was not the only country reprimanded on Wednesday: six other countries, including Italy, Belgium and Poland, were found to be in violation of the bloc’s financial rules. All of these governments will begin negotiations with Brussels, which could extend for years, in July. Romania, which was warned about its fiscal deficit in 2020, has also been criticized as not doing enough to fix its finances.
Brussels’ rebuke raises the stakes for the party, which will end up taking power in the French parliament after two rounds of voting ending on July 7. The National Rally, which supports the “France First” economic protectionist policy, could have greater influence than ever before. That drove out Mr. Macron’s centrist party and plunged Parliament into gridlock.
“None of these outcomes are conducive to fiscal policy,” Mujtaba Rahman, European managing director of Eurasia Group, wrote in a note. “A unified far-right or left-wing government would actually widen the fiscal deficit.”
Mr. Macron had already ordered his government to begin normalizing its finances. European Economic Commissioner Paolo Gentiloni said on Wednesday that despite Brussels’ rebuke, France is moving in the right direction.
But the political chaos unleashed by Macron by calling elections spooked investors who increasingly saw France as attractive for investments. They are now focusing on the potential for instability if Macron is forced to govern alongside the National Rally’s chief lieutenant, Jordan Bardella, a disciple of Ms. Le Pen.
Bardella said that if he took power, his first priority would be to address the cost-of-living crisis that has hit French households, primarily by cutting taxes on energy, gas and electricity at a cost of “several tens of billions.” euro. It will also reduce income taxes on French people under the age of 30 and encourage companies to increase salaries by 10 percent, without imposing additional taxes on social security.
Bardella this week backed away from some of his most expensive pledges, including a plan to lower France’s retirement age to 60, after independent economists estimated the total cost of his program at about 100 billion euros, rattling investors. French stocks fell more than six percent last week before recovering some of their losses in recent days. The risk premium required by investors to hold French government bonds compared to German bonds, the euro zone’s benchmark, is near its highest level since 2017.
Investors are also concerned that the left-leaning New Popular Front coalition will throw fiscal caution to the wind with its pledges to increase the minimum wage, lower the retirement age to 60 and freeze prices on necessities including food, energy and fuel. The party said it would reject EU budget rules.
French Finance Minister Bruno Le Maire said this week that opposition parties “will open the floodgates of public spending at a time when we must recover our accounts.”
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