Article

Macron threatens EU financial discipline

The French centre is under strain amid President Emmanuel Macron’s electoral gamble. It threatens European financial discipline.

| 8 min read

The European establishment is used to riding out the challenge of new and more extreme parties in individual countries. There have been many of these challenges this century. The traditional centre-right and centre-left Christian and Social Democrat parties that used to alternate in government in the last century have in many cases shrunk into insignificance. However, the combination of proportional voting in many countries, the different years for elections in so many places and the varied platforms of the parties has so far prevented these challengers making big changes in the central policies of the European Union (EU).

Syriza in Greece hurled itself against budget austerity because it was struggling to meet euro debt and deficit controls. It eventually gave in when the EU held out against special terms and blocked euro bank accounts in the country. In Italy, successive populist waves by parties including Forza, Lega and now the Brothers has led to compromises between the EU and the national governments.

Hungary and Poland have been more argumentative and stayed more on the fringes of the wider project. More recently, Polish electors have created tension in their parliament with a pro-EU prime minister in disagreement with the president friendly to the Law and Justice Party, that is often in disagreement with the EU.

Recent pressures in many countries have been against the numbers of legal and illegal migrants coming to some countries in the EU.

Recent pressures in many countries have been against the numbers of legal and illegal migrants coming to some countries in the EU. It led to government change in The Netherlands last autumn and was a visible influence in the recent European elections. Today, the centre of the battle is in France.

Seeing the bad results for his own centrist bloc of parties in the European elections, French President Emmanuel Macron called a general election. He challenged the French people to back off from voting for anti-establishment parties, asking them to show some confidence in him and the EU-insider approach.

The polls rushed out after the surprise announcement of an early election so far show support for him at around 20%, with National Rally in the mid-30s and a left-wing alliance the New Popular Front in the high twenties. If the polls stay like that this weekend, when the first-round voting takes place, it means the main contest is between two challenger blocs of voters, with the centre squeezed.

What does the EU establishment want to happen?

The EU establishment will not want either the National Rally or the Popular Front to emerge with majority power in the French parliament – or to lead a coalition with different policies to the recommended. The EU and the Eurozone seeks to regulate the debts and deficits of member states.

To belong to a single currency a state must accept that its borrowings are a matter of common concern to other members. As all countries are borrowing at a rate related to the common short-term interest rate set by the European Central Bank they do not wish to see longer term rates in particular countries driven too high by excessive borrowing.

Whilst the EU no longer thinks it can get most members back below the 60% state-debt-to-GDP ratio of their treaty requirements, it wants to re-establish the lesser aim that state debt as a proportion of GDP should be falling where it is over 60%. This has led the EU into seeking to guide or control fiscal policy more generally, with requirements for pathways for spending and advice on taxation.

President Macron has been unsuccessful in carrying through the EU requirements. He has made some cuts to budgets but spending and borrowing are still growing. He has put the pension age up to 64 from 62, which was an unpopular idea. He has made some selective reductions in social security charges and company taxes to try to lower business costs to make France a bit more competitive.

Today, he faces the full fury of both the left alliance and National Rally over pensions. Meanwhile, the EU and the International Monetary Fund (IMF) are pressing for further cuts of maybe €25-30bn for next year’s budget, with warnings that the deficit is going to remain closer to 5% than the 3% both institutions recommend.

What do National Rally and the Popular Front want?

They both want power and see an opportunity in this surprise election given the unpopularity of the president and his Ensemble grouping. They are both tapping into public concerns about the cost-of-living crisis, the past squeeze on incomes and the feeling that the state is not looking after them. National Rally voters are also very concerned about the extent of migration into France and cultural and social issues.

The left has formed an alliance of France Insoumise, Communists, Socialists and Greens. They wish to reverse the older age for pension entitlements and would like to go on in due course to take it back down to 60 from 62. They want to freeze the price of essential goods and energy. They would put up civil service pay and increase the minimum wage by 15%. They offer tax rises to help pay for this, with a proposed set of tax increases on wealth, property and inheritance. They have issued a 24-page manifesto for the election. They would introduce more safe routes for migrants into France, demand a ceasefire in Gaza and set up an Agency to help asylum seekers.

National Rally has put plenty of material out for the last Presidential and European elections. It has been toning some of this down by removing items on Vladimir Putin, for example, from its website. It wants to make a major reduction in legal and illegal migration and deport foreign offenders. It wants to lower VAT on fuel from 20% to 5.5% and exempt France from the EU electricity market. It wants to lower the pension age, raise wages and privatise TV and radio. It would also introduce proportional representation.

Impact on the French economy and markets

Both the EU and the IMF think French debt as a percentage of GDP, at 112%, is too high. The EU thinks it will rise to 118% in 2029 and 130% by 2034. The IMF sees it rising by 1.5% a year. France is being put into the EU’s Excessive Deficit Procedure to try to get annual borrowing down. The IMF thought the current deficit of 5.3% could still be at 4.5% in 2027. EU requirements are for it to get down to 3%.

The equity and bond markets have fallen on news of the election, mainly worrying that there could be a National Rally or Popular Front prime minister pushing a more expansionary fiscal policy with higher annual borrowings and a reluctance to tackle the underlying debt and deficit problem. It would be an uncomfortable period of government with a prime minister trying to follow a more populist course with spending and taxing and a president wanting to get closer to the restraints of EU and euro policy.

This battle is reflected in other European countries. It will annoy the German-led group of more prudent countries, which expects other member states to control their borrowings and to live under the EU deficit rules. It reflects the fact that the EU is experiencing slow growth and is falling behind the US, leading to voter frustrations.

The lack of growth means more demand for public spending and less tax to pay for it. This is a headwind for European investment. President Macron has just put up the political risks and, in the end, may end up in a worse position than if he had not called a snap election.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Macron threatens EU financial discipline

Read this next

How are markets doing halfway through 2024?

See more Insights

More insights

Article
Markets watch election news
By Charles Stanley
01 Jul 2024 | 7 min read
Article
How are markets doing halfway through 2024?
By Charles Stanley
27 Jun 2024 | 6 min read
Article
AI sweeps the market off its feet
By Charles Stanley
24 Jun 2024 | 6 min read
Article
French bonds, an election and excessive deficits
By Charles Stanley
21 Jun 2024 | 5 min read