With less than two weeks until crucial legislative elections, a new item has been added to the list of problems facing French President Emmanuel Macron: potential financial sanctions from the European Union for failing to rein in the country’s ballooning budget deficit and debt.
The disciplinary action, announced in Brussels on Wednesday, highlighted France’s fragile finances amid political turmoil as Marine Le Pen’s far-right National Rally party and the left-wing New Popular Front coalition look increasingly poised to form a new government that could weaken Mr Macron’s power base.
Macron plunged French politics into turmoil earlier this month when he called for early parliamentary elections after his party suffered a crushing defeat to the far-right in European elections.
The fiscal warning from EU officials has set up a potential clash between Brussels and Paris. Both the National Rally and the New Popular Front have pledged to boost spending on public services, as President Macron faces steep budget cuts of up to 25 billion euros ($26.9 billion) this year to improve state finances. But the opposition is critical of EU institutions and would prefer to loosen rather than tighten fiscal policy.
France has about 3 trillion euros of debt (more than 110% of gross domestic product) and a budget deficit of 154 billion euros (5.5% of economic output), a financial crisis caused by President Macron’s heavy spending to support workers and businesses during the pandemic lockdown. His government also provided subsidies to help households when inflation soared after Russia’s invasion of Ukraine caused energy prices to soar.
EU rules typically require member states to maintain fiscal discipline and impose heavy fines if debt exceeds 60 percent of gross domestic product or if budget deficits exceed 3 percent.
Those rules were suspended after the pandemic, when all European governments spent aggressively to protect their economies. But the EU reinstated them this year, warning big-spending countries to quickly close the gap or face the so-called excessive deficit procedure, which allows indebted governments to negotiate with the EU or be fined.
France was not the only country to receive a reprimand on Wednesday. Six other countries, including Italy, Belgium and Poland, were also found to be in breach of EU fiscal rules. Their governments are due to start negotiations with the EU in July, but the process could take years. Romania, which received a warning over its 2020 budget deficit, was also cited for not doing enough to improve its finances.
The rebuke from Brussels raises the stakes for the party that will take power in France’s parliament after two rounds of voting that end on July 7. The National Rally, which supports protectionist “France first” economic policies, could have more influence than ever and crowd out Mr Macron’s centrist parties, driving parliament into a deadlock.
“None of these outcomes bode well for fiscal policy,” Mujtaba Rahman, European managing director at the Eurasia Group think tank, wrote in a note. “A far-right or left-leaning coalition government would likely lead to larger budget deficits.”
President Macron has already told the government to begin fiscal consolidation, and European Commissioner for Economic Affairs Paolo Gentiloni said on Wednesday that France was moving in the right direction, despite the rebuke from Brussels.
But the political turmoil caused by Mr Macron’s election call is unsettling investors who had seen France as an increasingly attractive place to invest. They are now focusing on the potential for instability if Mr Macron is forced to govern with Jordan Bardella, a Le Pen protégé and top official in the Rally National party.
Bardella has said his first priority if he takes power will be to tackle the cost of living crisis hitting French families, offering “billions” of euros in cuts to taxes, mainly on energy, gas and electricity. He also pledged to cut income tax for French people under 30 and encourage companies to raise wages by 10 percent but impose no additional social security taxes.
Mr. Bardella this week backed away from some of his more costly pledges, including a plan to lower France’s retirement age to 60. Independent economists have estimated that his overall plan would cost about 100 billion euros, spooking investors. French stocks fell more than 6 percent last week but have recouped some of the losses in recent days. The risk premium that investors are demanding to hold French bonds over German government bonds, the euro zone’s benchmark, is approaching its highest level since 2017.
Investors also worry that the left-leaning New Popular Front coalition government will ignore fiscal prudence with promises to raise the minimum wage, lower the retirement age to 60 and freeze prices of basic goods like food, energy and fuel. The party has said it will reject EU budget rules.
“At a time when we need to get our finances in order, the opposition will open wide the door to public spending,” French Finance Minister Bruno Le Maire said this week.
