Yahoo Finance Why Macron’s France is headed for the Brussels bail-out club
It was all smiles last month when Emmanuel Macron rolled out the red carpet for an unshaven Elon Musk.
The French President is hoping to attract more investment in electric cars from billionaires like the Tesla boss. A year into his second term, Macron is pressing ahead with an agenda that he hopes will make the country more dynamic and keep people working for longer.
While the prospect of securing big money from Musk provided Macron with a much-needed boost, it’s been a rough ride for the man who once compared himself to Jupiter.
Today, the self-styled Roman god has been brought down from Mount Olympus by repeated protests over pensions reform and the loss of his parliamentary majority.
Europe’s second biggest economy has also struggled to shake its chronic addiction to spending. Macron himself pledged to protect French families from the financial burden of a pandemic lockdown “whatever the cost”, and Russia’s invasion of Ukraine forced his hand again.
But as interest rates rise to contain inflation, those costs are coming back to bite.
French families were shielded from the worst of a spike in energy bills after the government forced EDF to cap prices at a loss. The power giant sued, but was eventually nationalised.
Macron also slashed the cost of filling up a car and handed out extra money to the poorest. Inflation peaked at 6.3pc in France, compared with more than 11pc in the UK.
The moves saved French households from a lot of short-term pain, but left the republic with little room for manoeuvre.
France already is the most bloated state in Europe, with public spending at around 58.2pc of GDP in 2022.
Spending on social benefits like pensions and public sector wages as a percentage of GDP is over 10 percentage points higher than neighbouring European nations.
In its recent health check of the economy, the International Monetary Fund (IMF) highlighted that the French government’s firefighting during times of crisis has never been matched with spending cuts once the worst is over.
“Public debt has been trending up in the past four decades as France struggled to contain fiscal deficits... with significant debt ratchet effects as fiscal support was not fully unwound following crisis episodes,” the IMF said.
The Gallic nation has now been hit by a double dose of bad news delivered by top rating agencies.
Fitch – which recently downgraded France’s credit rating to AA-, putting it in the same league as the UK, Czech Republic and Estonia – sees no end in sight for the country’s rising debt levels as policymakers fail to rein in spending once again.
“Forecasts for France’s debt dynamics put general government debt on a steady upward path to 114.3pc of GDP by end-2027, around 17 percentage points above the pre-pandemic level,” Fitch noted in its April downgrade.
Meanwhile, S&P said last week that France remained at risk of a downgrade before the end of the year, which could add to the country’s borrowing costs.
The verdicts put France in a club of countries that not long ago were associated with bail-outs and Brussels diktats. While France’s debt share is now projected to rise, Greece, Italy and Portugal are expected to see their debts fall relative to the size of their economies.
The IMF had an even starker message for Paris: carry on as you are and debt will rise above 120pc of GDP in the 2030s, and will continue to grow indefinitely.
This reality – and the fact that many French people retire in their early sixties, despite living well into their eighties – has forced Macron’s hand.
In April, he was forced to use special constitutional powers to push through a rise in the pension age from 62 to 64 that was met with chaotic scenes.
Radical left politicians belted out the national anthem in parliament in an attempt to drown out the prime minister, Élisabeth Borne, as she announced the reforms. Widespread public protests followed, leading to fears that the law would have to be repealed.
The anger has since dissipated, even turning into acceptance in some quarters.
Perhaps reflecting a French attitude to work and protest, Michel Moulbach, a building worker in the northeastern city of Lille, told AFP that the protests had allowed people to express anger “but you need to be realistic”.
After all, everyone needs a break. With summer holidays on the horizon “it will be hard not to take a pause,” he told the news agency.
There are further glimmers of hope. Two factors will help to get French debt back on track, says Holger Schmieding, chief economist at Berenberg Bank, who highlights that French reforms have helped to bring down unemployment significantly in the past few years.
“First, market prices for gas and electricity have corrected. That will mean significantly fewer and thus far less costly government interventions to keep the path of consumer prices for energy at a politically acceptable level,” he says.
“Second and most importantly, the experience of other countries including Germany after its 2003 reforms show that the key to restore fiscal balance is to raise employment and thus revenues rather than to cut spending.
“And for growth in employment and, hence, the tax base, France is on the right track.”
Others are more sceptical, particularly in a world of higher interest rates, which has seen the cost of servicing debt grow.
Last week, Bruno le Marie met with representatives of S&P to state the case for France keeping its AA investment grade rating, after S&P had warned France in January that a downgrade was possible. Despite the charm offensive, ratings chiefs kept France on notice.
Charlotte de Montpellier, senior economist at ING, notes that the recent increase in French borrowing costs – like the UK’s – is set to continue.
“When sovereign spreads exploded upwards a decade ago during the European sovereign debt crisis, foreign buying was in part credited with preventing France from joining the club of high-debt, wide-deficit countries that risked losing market access,” she says.
“With Japanese buying of foreign bonds having turned to net selling last year, that support has disappeared. The ECB has also stopped actively hoovering up European debt through its quantitative easing programme.
“This is not to say that we’re expecting a repeat of the euro sovereign crisis, but two key tailwinds have disappeared for French bonds. This should make sovereign debt, including that of France, that much more sensitive to a deterioration of their issuers’ credit quality.”
France has about 25.9pc of GDP worth of principal and interest maturing in the next two years, with one tenth of the country’s overall debt tied to movements in inflation.
Rémy Carasse, lead analyst at S&P, stopped short of accusing the government of living in a fantasy land when the rating agency delivered its verdict on the French economy. But he said the Elysee’s “weak track record of budget consolidation over five decades” spoke for itself.
“We continue to think that the risks to public finances remain significant with downside risks to government forecasts, but also to our forecasts. And this is why we decided to keep the negative outlook on the data we follow,” Carasse added.
Frank Gill, a senior director at S&P, added that France’s ambitions to cut benefit spending look “timid” compared with other countries.
“If you look at the rest of the OECD with, with the exception of the US, there is no other sovereign in developed markets where we expect such a slow, and fairly moderate budgetary adjustment between now and 2026,” he said.
Investors will be watching Macron’s next steps keenly.
