PARIS — French President Emmanuel Macron isn’t just staking his political life with his call for a snap election. He is also taking a mighty gamble with the French economy.
Financial markets are shivering in horror at the prospect of the far-right National Rally gaining more power in the eurozone’s second biggest economy — a scenario that could stall work in parliament and blow even bigger holes in France’s already overstretched budget via a populist spending bonanza.
After Macron called the election on Sunday, the tremors were instant. The euro fell for two days in a row against the dollar, the CAC 40 stock market index in Paris lost some 3 percent, and the yield on the benchmark 10-year government bond, a barometer of economic and political risk, spiked to new highs for the year.
Earlier this month, France had already suffered a downgrade on its creditworthiness from the Standard & Poor’s rating agency, which pointed to political fragmentation as a danger. While France is not yet sinking to the same risk category as debt-laden Italy, bond buyers do now see French debt as an investment of a similar risk to Portugal’s.
In a press conference on Wednesday, Macron was quick to seize onto the alarm in the markets as a signal that voters should mobilize against the National Rally. Wobbles in the debt market, he reminded them, quickly hit the real economy. After all, government with spiking borrowing costs and big debt bills have less cash for hospitals, schools and public transport.
“The markets are going crazy, European and international partners are worried. What does this mean for the daily life of French people? Access to credit will be more expensive, loans for accessing housing will be more expensive,” he said, insisting that his liberal government had the “seriousness and consistency” to manage the economy.
Macron called the election after being hammered in the EU election in the hope that he would be able to corral a united front against the far right — but the danger is the far right, even if it does not win an absolute majority — could still create a political impasse and sow chaos in the eurozone’s second biggest economy.
National Rally’s chief economic goals include reducing the pension age from 64 to 60, totally unraveling one of Macron’s landmark economic reforms.
Finance Minister Bruno Le Maire fulminated about the potential consequences of the National Rally in power. “The program of the National Rally is a Marxist program, purely and simply Marxist … I would like to know who is going to pay the bill of the Marxist program of Marine Le Pen,” he said in an interview with the BFMTV channel.
Le Maire also had a sharp message for industry leaders, whom he accused of being frustratingly silent on criticizing the National Rally’s agenda. “Be aware that, if that program passes, we close factories and we lose jobs.”
Doubling down on Wednesday, he said: “The economic world fears the National Rally.”
Debt bomb
Macron’s maverick call for an election doesn’t just raise the specter of trouble on the home front. France is already one of the bad boys when it comes to EU deficit rules, and the political chaos sets up even more tensions with Brussels.
The timing could hardly be worse. Next week, the European Commission is expected to publish a report spotlighting profligate countries, among them France. That’s the first step of a painful, Brussels-mandated belt-tightening process known as the Excessive Deficit Procedure, which will be made all the more fraught if a nationalist government takes power in Paris.
After the election was called, credit rating agencies were also quick to sound the alarm bell. Analysts at Moody’s, one of two ratings companies that spared Paris a downgrade recently, signaled that it might not take much to change their mind.
“Potential political instability is a credit risk given the challenging fiscal picture the next government will inherit,” analyst Sarah Carlson and her team wrote on Monday, noting that France’s debt burden is set to keep expanding, to reach 115 percent of GDP by 2027, a snowballing progression from 98 percent in 2019, and 64 percent in 2007.
After spending its way through the pandemic and the energy crisis, France is now having to tighten its belt. Paris is cutting €20 billion of public spending this year and is planning to cut at least €20 billion more in 2025.
Putting the house in order
In the unlikely — but possible — event that the far right wins a majority, Macron would be bound by tradition to nominate a National Rally prime minister, who would then be in charge of setting the government’s policies. The party’s rising star, 28-year-old Jordan Bardella, has already offered himself for that job.
The National Rally has repeatedly opposed Macron’s controversial pension reform and other spending cuts proposed by Finance Minister Le Maire. When Macron raised the retirement age for most workers to 64 from 62 last year, the National Rally’s Marine Le Pen had campaigned for it to be cut to 60 for some categories of worker.
While the party hasn’t published a manifesto for the upcoming poll, the Institut Montaigne think-tank estimated that the economic policies advocated by Le Pen in the 2022 election would have widened the deficit by a staggering €101 billion a year.
“If you have an extreme-right government with a chap who is inexperienced, we are going to see a bump,” said Maria Demertzis, a senior fellow at the Brussels think-tank Bruegel. “Rating agencies are going to have a ball.”
A French minister, granted anonymity to discuss the situation candidly, defended Macron’s decision to call an election and stressed that France’s good name in the markets and on the international stage is in danger.
“Will France and its [credibility] remain solid if the National Rally and supporters of retiring at 60 win the elections?” the minister asked ironically.
The National Rally, which has never held power at the national level, rejects such criticisms — especially when they are leveled by the current government.
“We don’t need to take lessons from those who have ruined France,” said Jean-Philippe Tanguy, who is considered Le Pen’s most prominent lawmaker on economic policy. “Their criticisms are compliments,” he added.
But the National Rally recipe to put France’s public accounts in order is unclear, experts say.
“This uncertainty is a problem in itself, as good economic policy needs to be clear and predictable,” consulting firm Astères said in a report this week. In a recent TV debate with French PM Gabriel Attal, the economy was seen as Bardella’s Achilles heel.
The right-wing party wasn’t the only one that had bristled at Brussels’ fiscal rules, said Eulalia Rubio, senior researcher at the pro-EU Jacques Delors Institute. But what’s really spooking markets, she said, is the “fear of incompetence, or the unwillingness to pass unpopular reforms.”
France’s powerful industry lobby Medef on Tuesday also warned against the economic agenda of the National Rally, in a statement slamming some of its main proposals without naming the party. “We cannot risk financial instability and the distrust of our economic partners,” it wrote.
In Brussels’ sights
France’s worrying debt level was already under the spotlight of the European Commission.
On June 19, the Commission will publish a report on France and 10 other countries that had an “excessive deficit” in 2023. France is comfortably on the wrong side of an upper limit of 3 percent of gross domestic product, having run a budget deficit of 5.5 percent of GDP last year.
Countries over the 3 percent limit are required to cut their deficit annually over the course of a number of years until the debt is either on a firm downward trajectory, or stable at an acceptable level decided by the Commission.
Paris is “unlikely” to reach the 3 percent level by 2027, according to Moody’s.
Technically countries should be fined over excessive debts and deficits, but France has always been granted considerable political slack by the EU. The emergence of the National Rally in a key role may change that.
A National Rally government that butts heads with the Commission could find itself in a more precarious place under the EDP.
But a National Rally government set on a radical change of policy would soon run into external constraints “that are difficult to get around,” in the shape of financial markets and the EU, said Francesco Saraceno, deputy head of the French Observatory of Economic Cycles at Sciences Po Paris.
Now even far-right rising star Bardella is starting to realize that Le Pen’s expensive proposals could undermine the party’s credibility and hinted that he could backtrack, for instance on pensions.
“Economically, I’m reasonable,” he promised.
Geoffrey Smith contributed reporting
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