Macron’s government has latched onto the economic worries as a campaign theme, warning of the consequences if its opponents came to power.

French Finance Minister Bruno Le Maire warned last week that a victory by the left-wing alliance would lead to economic collapse and the country’s exit from the EU.
“Their program is complete madness,” Le Maire said on Franceinfo radio. “It will guarantee downgrade, mass unemployment and an exit from the European Union.”

EU to Slam France on Budget Deficit, Adding to Macron’s Woes

William Horobin and Jorge Valero

Wed, June 19, 2024 at 2:17 AM MST·5 min read

(Bloomberg) -- The European Union is set to admonish France for breaking the bloc’s deficit and debt rules, triggering a process that can lead to onerous fines and complicating campaign priorities less than two weeks before voting starts in legislative elections.

Most Read from Bloomberg

The EU rules include strict measures for nations with debt higher than 60% of gross domestic product and a budget deficit of more than 3%.

France’s deficit was 5.5% last year, with debt at about 111% of GDP.

The indebtedness will limit the next government’s ability to implement a range of promises that may include lowering tax revenue or undoing market friendly pension reforms. — along with of the far-right National Rally — will also be wary of doing anything that further spooks markets, which have been in turmoil since the president called the snap election a week ago.
“Financial markets would be the limits to what the National Rally plans to do,” Famke Krumbmüller, EMEIA leader of geostrategy at EY, said Tuesday. “Whoever will be in power will be constrained by how the financial markets react to their program.”
France isn’t alone in making the so-called excessive deficit procedure list due to be announced Wednesday. A person familiar with the matter told Bloomberg on Tuesday that it will also include Italy and another five countries. Still, Spain and three others who breached the 3% limit escaped.

The EU reprimand is set to occur just as the French campaign enters a pivotal moment, with the National Rally on course to take 32.7% of the vote, according to Bloomberg’s poll of polls ahead of elections on June 30 and July 7.

The left-wing New Popular Front, which includes Socialists, Communists, Greens and the far-left France Unbowed, is expected to get 26.3%.
That puts Macron’s Renaissance party and its allies in third place.

The two groups best positioned to form a government after the snap election — the New Popular Front and National Rally — have signaled a more confrontational approach to both spending and taking on Brussels than Macron.
“We’re opposing the austerity budget proposed by the EU,” Communist Party head Fabien Roussel told Franceinfo radio on Wednesday. “We’re refusing these rules.”
He said the New Popular Front plans additional spending on healthcare, security, justice and other needs, as well as increased taxes on the most wealthy.

Socialist Party leader Olivier Faure reiterated on RTL radio that the alliance would scrap Macron’s pension reform and “do what public finances allow.”
Valerie Rabault, a Socialist candidate and former budget recorder, told Les Echos newspaper she estimates the New Popular Front’s program would lead to new spending of €106 billion ($114 billion) through 2027, a move that would further exacerbate France’s excessive deficit.
An all-out dispute with Brussels would have disquieting parallels with the euro-zone debt crisis, when the currency was brought to the brink as investors panicked over standoffs between EU institutions and heavily indebted governments.
Since then, the EU has bolstered its crisis-fighting toolkit, with the European Stability Mechanism bailout fund and the European Central Bank formalizing conditions under which it could step in to calm markets with bond buying. Still, the central bank would only activate such asset purchases for countries with “sound and sustainable fiscal and macroeconomic policies.”
Speaking on the eve of the EU’s decision, Bank of France Governor Francois Villeroy de Galhau repeated his call to avoid deepening budget deficits.
Respecting our fellow citizens “means recognizing the demands of reality, and not increasing even further heavy deficits that we cannot finance well,” he said.
Le Pen, who once campaigned to pull France out of the euro, has not yet detailed her program.

Party leader Jordan Bardella has touted measures that would strain the deficit further, with few details on the revenue the National Rally expects from spending less on immigration policies, combating tax fraud and cutting transfers to the EU.
Meanwhile, the parties in the New Popular Front have united around an election manifesto that includes freezing prices of essential consumer goods, raising the minimum wage, and rejecting the austerity constraints of the EU fiscal rules.
Even so, once in power the parties would likely have to tone down their rhetoric and avoid policies that would worsen relations with the EU, in a manner similar to Italy’s anti-migration prime minister, Giorgia Meloni, Krumbmüller said.
France was already facing difficulties controlling its budget deficit after tax receipts disappointed.

Before Macron called the election, his government was working on emergency spending cuts of around €20 billion this year and more than that again in 2025.

He managed to briefly bring the budget deficit below the EU limit shortly after he was first elected president in 2017, but massive spending during the Covid pandemic and energy crisis drove it markedly wider. His government still promises to get back under the 3% threshold by 2027 after a forecast of 5.1% this year.
The country’s debt, also according to the government’s long-term plans, will peak at 113.1% of GDP next year before declining to 112% in 2027.

There are no easy political solutions to repairing the deficit. Macron had limited his options by insisting on a mantra of not increasing taxes to preserve investment and job creation, but economic growth has been sluggish since the inflation surge. Spending cuts have also proven a thorny issue, with both the National Rally and the left leading a backlash against plans to remove costly energy subsidies introduced in the crisis.
Last month, S&P Global Ratings downgraded France, highlighting missed goals in the government’s deficit-reduction plans. After Macron called snap elections, Moody’s said the potential political instability is a credit risk and could affect efforts to trim the deficit.

-- With assistance from Samy Adghirni, Jorge Valero, Tom Mackenzie, Zoe Schneeweiss and Frank Connelly.

BNN Bloomberg

10 hours ago

France and Italy Get EU Scolding for Deficits as Markets Watch - BNN Bloomberg

French political risks shake European markets: Analysts react

By Piero Cingari

Published on 17/06/2024 - 12:13 GMT+2

Comments

European stock markets opened cautiously after last week's sell-off. Analysts continue to highlight French political risks as major source of risks heading into snap elections in less than two weeks.

European stock markets opened the week with caution, following a significant sell-off last week driven by rising political risks in France. The French CAC 40 index showed timed gains of 0.2% by 11:00 CET on Monday, following a 6.2% drop the previous week, marking its worst weekly decline since the Russian invasion of Ukraine in February 2022 and wiping out its gains for 2024.

The banking sector was significantly affected, with Societe Generale and BNP Paribas dropping by 14.5% and 12.2%, respectively, last week. These declines triggered a ripple effect, causing the Euro Stoxx Banks index to fall by over 8%. However, on Monday, the banking sector benchmark attempted to rebound by rising 0.4%.

The political crisis in France, sparked by the unexpected results of the weekend's European elections, is heavily weighing on European markets and causing a widening of yield spreads between government bonds within the eurozone. Although the yield on 10-year French OATs remained stable at 3.15%, its spread versus German Bunds closed the week at over 75 basis points, the highest level since July 2017 when the potential risk of a 'Frexit' was priced in due to Marine Le Pen's election prospects.

Over the weekend, five European Central Bank (ECB) officials told Reuters there are no plans for emergency purchases of French bonds amid the political unrest in Paris, emphasising that it is up to French politicians to calm the markets through prudent economic policies.

A recent poll by Ifop for Le Journal du Dimanche, dated 15 June, indicates Marine Le Pen's National Rally party leads with 35% support, followed by the left-wing coalition of the New Popular Front at 29%, which has strong backing among 18-24 year olds. This scenario suggests a shift towards extreme parties compared to centrist and market-friendly parties, with President Emmanuel Macron's Together coalition currently third with 19% support.

On Monday, Citi's global equity strategists downgraded European equities to 'neutral' from 'overweight', citing increased political risks following France's decision to call a snap parliamentary election.

Goldman Sachs equity analyst Lilia Peytavin commented that if the far-right party's 2022 programme were implemented, market reactions could be severe. However, she also suggested that the measures might be more business-friendly than expected, as the far-right will aim to secure the 2027 presidential election, potentially surprising markets positively.

Peytavin noted that the elections of Donald Trump in the US and Giorgia Meloni in Italy had elicited unexpectedly positive market reactions compared to pre-election expectations.

Goldman Sachs added that French international stocks, such as Remy Cointreau, L'Oreal, LVMH, Dassault Systemes, Sodexo, Michelin, Pernod Ricard, EssilorLuxotica, and Publicis, would likely be the least affected.

"At the EU level, despite the outgoing majority maintaining control, the focus of the next legislature will shift from the green and digital transition to more industrial and political themes. We can anticipate a move from a liberal approach to more interventionist public involvement in the economy," wrote Intesa Sanpaolo analysts Pasquale Lodato and Luca Cigognini.

Comments