One thing was clear after France’s surprise election results on Sunday: Any new government formed by President Emmanuel Macron would face months of political paralysis. What is less certain is whether the impasse will further distress France’s heavily indebted economy.
The unrest has focused attention on France’s mounting debt of 3 trillion euros and a deficit that has ballooned to more than 5 percent of economic output, and immediately prompted a warning on Monday from ratings agency Standard & Poor’s on its debt rating. sovereign of France.
“Uncertainty hangs over the future architecture of France’s government,” said the agency, which had already downgraded France’s debt rating on May 31, shaking a government whose economic credibility has been one of its key political assets. If the polarization of France’s new Parliament weakens the government’s ability to manage its finances, France’s debt could go down again, he added.
France is facing uncharted territory after left-wing parties surged in nationwide legislative elections, eclipsing the anti-immigration nationalist Rally National party to secure a majority of seats in the lower house of Parliament. The result left no party – including Mr Macron’s centrist coalition – with a majority and has divided the lower house of Parliament into three bitterly antagonistic blocs.
The French economy was already in a difficult situation. Unemployment, which fell last year to a 15-year low of 7 percent, has risen again as manufacturers curb output and exports slow. Consumers, weary of persistent inflation, had also cut back on spending, a key driver of growth.
Mr. Macron’s government recently warned that growth would be weaker than expected this year as it aimed to cut spending by more than 20 billion euros (about $21.5 billion). The European Union reprimanded France late last month for violating fiscal rules that limit spending and borrowing. France’s debt has climbed to more than 110 percent of economic output and it runs a deep budget deficit as the government spent heavily to protect consumers and businesses from pandemic lockdowns and high energy prices.
Mr Macron’s opponents on the right and left seized on the debt to attack him during their campaigns. But the main parties are in no mood to reach a consensus and investors are worried that the new Parliament will fail to pass a budget in the autumn that would include deep spending cuts and avoid the risk of further downgrades of sovereign debt. France.
“Once the dust has settled, the impasse of a hung Parliament will prove more damaging than first implied,” Alex Everett, investment manager at Abrdn, a London-based investment firm, wrote in a note to clients. “France’s budgetary problems have not disappeared. Macron’s attempt to force unity has fueled yet more discord.”
Investors had already driven up the government’s borrowing costs. The difference between the interest rate investors are charging on French debt versus Germany’s has widened to its biggest gap since the financial crisis, a sign that investors are worried about France’s ability to manage its finances. The risk is that France’s debt grows even more, which could lead to a faster rise in interest payments.
Complicating the picture is the left-wing alliance, the New Popular Front, which won a majority of seats in the lower house of Parliament on Sunday. The party, a bloc that includes Communist, Green and Socialist lawmakers, is pushing a heavy-handed “tax the rich and spread the wealth” agenda inspired by the far-left France Unbowed party, and has said it is ready to break the rules fiscal of the European Union. if necessary to perform its platform.
Indeed, unless the government raises taxes on businesses and the wealthy, the left-wing bloc is likely to reject a national budget that respects France’s pledge to Brussels and debt rating agencies to cut the deficit next year to 4.4 percent of gross domestic product, from 5.1 percent. , Mujtaba Rahman, managing director for Europe for the Eurasia Group, wrote in an analysis. The group will also demand more spending on education and health care and possibly push to raise France’s minimum wage, he said.
But the left, valiant though they are, will lack overall control, so their agenda has little prospect of approval. This has eased fears among some investors about the economic cost of the New Popular Front’s spending program. The estimated cost would be up to 187 billion euros a year, a total that would rely on up to 150 billion euros in tax increases on businesses and wealthy individuals, and the removal of a range of corporate tax breaks.
“A hung Parliament is probably the best solution for European stocks,” said Claudia Panseri, chief investment officer for France at UBS Global Wealth Management.
On Monday, Mr Macron’s finance minister, Bruno Le Maire, warned in a post on X that the left-wing bloc’s economic program could lead France into a financial crisis and economic downturn. “It would destroy the results of the policy that we have followed for seven years and that has given France jobs, attractiveness and factories,” he said.
Holger Schmieding, chief economist at Berenberg Bank, said the legislative deadlock “presages the end of Macron’s pro-growth reforms”. Instead, he said, Mr Macron’s centrist coalition would probably have to agree to reverse some of his signature initiatives – possibly including his move to raise France’s retirement age to 64 from 62, which led to nationwide demonstrations in 2022.
In the longer term, Mr. Schmieding added, such changes and discontent among global investors are likely to reduce growth and increase inflation in France. “Together with potential credit downgrades, this would raise funding costs and exacerbate France’s fiscal problems,” he said.