The early dissolution of Parliament was followed by a financial shock, albeit mild, on the French markets. The spread with ten-year German Bunds widened to its highest level in a year, exceeding 53 points, and the yield on OATs (French BTPs) rose by eighteen basis points to 3.7%. The Paris Stock Exchange was even more bad, with French stocks holding the lowest positions in the European indices: the banks were especially hit by the sales, starting with Société Générale (-7.3% on Monday, black jersey of the Cac 40), Bnp Paribas and Crédit Agricole, but also public works or services companies such as Vinci or Engie with losses of around 5 percent.
President Emmanuel Macron is sending a country to the vote with its accounts turned upside down: excessive deficits and without a credible recovery date, rising public debt, a sovereign creditworthiness that suffers the obvious consequences and, in June, probably the start of a infringement procedure by the European Commission. It seems like Rome is (also) Paris where political stability, which is often lacking in Italy where governments are made and unmade with parliamentary maneuvers carried out by seasoned peons, has always acted as a counterweight to management of public accounts in recent times cheerful to say the least.
Gilles Gressani: “For many the name Le Pen is radioactive, with Bardella he can replicate Meloni’s rise”
by Giulia Belardelli
The dissolution of the National Assembly, the first since 1997, opens a phase of uncertainty. The final vote count attributes 31.36% to the Rassemblement National, 14.60% to Macron’s Valérie Hayer (Renaissance), 13.83% to Raphael Glucksmann (PS-Place Publique). Macron’s move in France is therefore seen as a gamble but the brilliant result obtained by Marine Le Pen’s party, led by his protégé Jordan Bardella, does not necessarily anticipate an equally overwhelming victory in the legislative elections, scheduled for 30 June and 7 next July. The French double-round system in fact makes it very complicated for parties considered extremist to obtain a majority in Parliament, precisely because in the second round it tends to bring together all the moderates against those with more radical positions.
Certainly, the phase of uncertainty that has just opened exposes the financial vulnerabilities that political stability had so far managed to hide behind the veil of Europeanism and Atlanticism. Even if the party of Le Pen and Bardella no longer evokes Frexit, i.e. France’s exit from the European Union, its economic program, if implemented, risks devastating the already problematic French public finances. The reduction of VAT on hydrocarbons from 20% to 5.5%, proposed by Marine Le Pen in 2022, alone would have an impact of ten billion euros a year, according to the Institut Montaigne. Difficult to implement, as demonstrated by the Italian experience with the former Eurosceptic prime minister, Giorgia Meloni, who came to power with the promise of cutting excise duties on fuel and system costs and now a passive and helpless witness in the face of the increase in petrol at the pump and gas and electricity bills.
What is certain is that the prime ministers of the Macron presidency, such as the outgoing Gabriel Attal and Elisabeth Borne, do not leave the accounts in order, far from it. A boulder weighs on the public budget after the ratio between deficit and gross domestic product jumped to 5.5% in 2023 and the objective of reducing it to 4.4% this year appears optimistic to say the least. Public debt stands at 110% of GDP, much higher than the 98% when Macron first became president of France, and does not appear destined to fall. The financial risk is around the corner because even if Le Pen’s party does not win, the new Parliament that emerges from the polls could be much more fragmented than the current one, where Attal already has a relative, not absolute, majority.
Macron’s horror splatter. The deadly challenge to Le Pen and the sharks that multiply in the Seine
by Cesare Martinetti
A week before the European vote, S&P cut France’s rating to ‘AA-‘ from ‘AA’, with a stable outlook. According to the agency, the downgrade reflects the expectation of an increase in debt to GDP following higher-than-expected deficits in 2023-2027. In fact, Paris aims to bring the deficit/GDP ratio back to 5.1% in 2024, 4.1% in 2025, 3.6% in 2026 and 2.9% in 2027. For the current administration of Emmanuel Macron, returning to the constraints of 3% in 2027 represents a ”realistic and ambitious” objective. For 2024, the government has already cut ten billion and is seeking additional savings of another ten billion. After the European vote, Moody’s warned about the risks of the current political situation in France, to the point that the currently “stable” outlook on the Aa2 sovereign rating could be reduced to “negative” if the debt parameters were to worsen further.
For the Monetary Fund, Bercy’s calculations on public finances between now and 2027 are far-fetched. The IMF forecasts a deficit/GDP ratio ”significantly higher” than the government’s estimates for 2027 and has already appealed to the Paris government to introduce ”new measures” as early as 2024 to bring the debt back on a downward trajectory. “New budget consolidation measures are recommended in the medium term, starting as early as 2024, to put the debt back on a downward trajectory,” the Fund said at the conclusion of a mission to France called ‘Article 4’. The Washington-based body forecasts, in particular, a GDP deficit ratio of 4.5% in 2027 against the 2.9% forecast by the Paris executive.
Numbers which are also reflected in Brussels’ spring estimates according to which the debt stock in 2024 will be 112.4% of GDP, and in 2025 it will continue to rise to 113.8%, while the deficit next year will still be 5% (against the 4.1% estimated by the Attal Government). According to analysts at Scope Ratings, “the outcome of the early legislative elections in France could further limit the government’s ability to address the most urgent credit challenges, including the consolidation of public finances, if opposition parties strengthen their grip on the National Assembly”.
With the entry into force of the new European standards on public finances provided for by the Stability and Growth Pact, like Italy and Belgium, France expects an excessive deficit procedure. The Commission is expected to express its opinion on 19 June, coinciding with the so-called “spring package” of the European semester. There are eleven countries that risk the Commission’s ax for excessive deficit. The deficit procedure begins with a Commission report on whether a specific country has exceeded 3%. The European executive then proposes to the Council to take decisions on an excessive deficit. What the Commission will do on 19 June is not yet clear but, a spokesperson for the EU executive explained, the decision will take into account the latest Eurostat data on deficits for 2023.
In April, the president of the Paris Court of Auditors, Pierre Moscovici, defined 2023 as a ”black year” for France’s public finances before the National Assembly. For the former EU commissioner for economic and monetary affairs, this situation makes the recovery path much more “demanding”, with a “much steeper climb”. At the Elysée and in Bercy, security continues to be displayed but it is clear that the path will not be painless. It is in this context that Macron has called the early elections, aware that the budget maneuver will have to face an unprecedented financial challenge for the maintenance of public accounts in accordance with the new European rules envisaged by the Stability Pact. A gamble that will show how much credibility Macron still enjoys on the financial level, as we have seen, it is not much.
