Macron’s reform agenda tested as French MPs approve €20B inflation relief package

PARIS — France did what it does best: throw money at a problem. As the country faces soaring energy prices, 5.8 percent inflation and warnings of social unrest, the French National Assembly on Wednesday voted through a more than €20 billion package of stop-gap measures to dull the economic pain for households.

Measures include prolonging existing caps on gas and electricity prices, raising pensions and social benefits. The two bills forming the package will be debated in the French Senate next.

The package follows a warning in early July from the Cour des Comptes, the country’s public debt audit body, about the precarious budgetary trajectory of public finances ahead of President Emmanuel Macron’s new five-year term. 

And for its once-cautious, reform-minded president, the spending isn’t likely to stop with the passage of the purchasing power bill, given demands from the new kingmakers in France: the far-left France Unbowed, the far-right National Rally and the conservative Républicains. A cross-section of MPs from both sides of the aisle, including some populists, now carry enough weight in parliament to complicate the president’s agenda.

“The hardest part is now, we must make courageous political choices and not give in to the temptation of always spending more,” France’s Finance Minister Bruno Le Maire told reporters earlier this month. Le Maire has repeatedly ruled out going further, despite the criticism of the opposition parties, which will be tempted to raise the stakes given their new sway in the Assemblée Nationale since the legislative elections in June. If the proceedings in parliament in recent days — marked by loud protests and theatrics from the left — are any indication, tough political decisions could face even stiffer resistance.

According to France’s economy ministry, the country will have spent more than €40 billion euros to support households’ purchasing power, taking into account the latest measures as well as roughly €23 billion from October 2021. In terms of absolute value, this is one of the largest amounts injected into the system by any country in Europe. And what is provoking concern in some corners isn’t the absolute amounts of public spending but the direction it’s headed.

Sooner or later, economists warn, the government will have to face the music.

With interest rates rising and fears that a recession could be on the horizon, France’s high debt and deficit levels are a problem that can no longer be ignored. In 2022, the price of servicing the country’s public debt was expected to increase by €12 billion, more than the budget of France’s ministry of justice.

Macron now wants a reset. Coming to power in 2017, he cast himself as a market-friendly disruptor who wanted to save €60 billion by cutting public spending and implementing controversial pension and unemployment reforms. But after facing social unrest led by the Yellow Jackets movement, a major economic crisis triggered by the COVID-19 pandemic that necessitated a “whatever it costs” approach, and a now soaring inflation sparked by the Ukraine war, the president has had no choice but to go big on public spending.

However, Macron’s focus hasn’t changed and his liberal economic reform agenda is back on the table. 

“We are creating debt for our children. Do we have any margins for maneuver? No. We increased our debt during the COVID-19 crisis… But before that our policy was one of budgetary prudence. We must go back to it,” Macron said in an interview on Bastille Day.

And while the government says it wants to go back to basics, large swathes of the country are moving in the opposite direction. A much more radical parliament emerged from the parliamentary elections, with opposition groups from the left and the right calling for a medley of costly popular measures such as a lower retirement age and substantial price caps on fuel.

Ahead of the presidential election, Macron proposed raising the age to 65 from 62, which was met by hostility from the far-right’s Marine Le Pen and the far-left leader Jean-Luc Mélenchon. Instead, they want to lower it. Retirement age in neighboring Germany and Spain is 65. 

And if the government thought their consensual package of handouts would help them bridge the gap with the powerful leftwing alliance Nupes in parliament, they were wrong. Tellingly, France Unbowed voted against both bills on the grounds that the measures did not go far enough.

“We are world’s apart … We wanted ambitious cost-of-living legislation, you’ve given us crumbs. We wanted an ecological transition, you’ve given us more carbon. You are making a historical mistake, our society is suffering and you are indifferent,” said Green politician Sandrine Rousseau in the group’s closing remarks last Friday.

Troubles on the horizon

While France boasts solid growth levels and low unemployment after the COVID-19 pandemic, prospects are looking bleaker. Already a big spender, France is saddled with a level of public debt at 118 percent of GDP, above the EU average at 88 percent, according to Eurostat. 

France could keep spending without running into trouble in Brussels as EU rules on public spending are on ice at least until the end 2023. The government has repeatedly said that it will bring the level of deficit under the EU threshold of 3 percent of GDP by 2027 and, in parallel, is using its political weight in Europe to make sure that, once they are back, EU’s fiscal rules will be more permissive. The French economy ministry last week predicted that the deficit will be at 5 percent of GDP for 2022 and 2023, and will then decrease to 2.9 percent in 2027.

But prospects for reining in public spending also look difficult.

“A quite crucial element for France’s credit worthiness is stabilizing and reducing the debt burden,” said Sarah Carlson, lead analyst for France at rating agency Moody’s. As taxation in France is already high, the main way to reduce debt would be to reduce expenditure, she added. 

As France forks over more money to help consumers ride out the inflationary stretch, French officials struck a hopeful note, banking that growth will generate more taxes and help pay off the country’s debt.

“I hope that we are experiencing an inflation peak and that it will drop next year. We are trying to keep growth up,” said Jean-Réné Cazeneuve, rapporteur of France’s parliamentary financial committee. The government had hoped to replace existing measures on fuel with a targeted scheme, although it had to drop the idea to strike a deal with Les Républicains. However this surgical approach could be followed for other support measures, which would be targeted on those who need them the most, a French Economy ministry official said.

“[The cost-of-living package] is a stop-gap measure and as such you cannot repeat them indefinitely. It helps in the short term, because the government cannot find oil under the cornfields of France,” said Eric Chaney, adviser for Institut Montaigne and former chief economist for AXA. 

“The thinking is ‘let’s smooth the spike now’ and then focus on the long term,” he said, which include money-saving reforms such as slimming public administrations and pushing back the pension age. 

Easier said than done

Having lost outright majority in the legislative election in June, Macron’s plans will likely face a barrage of opposition from a broad cross-section of the French parliament, with slim hopes of success hanging on bringing the rump of the conservative party Les Republicains on his side. 

“It’s very difficult to push through unpopular reform in the current situation, so the most likely conclusion is that the key reforms will be put aside,” said Chaney. 

“So France will muddle through, without reforms and finding it difficult to cut debt in the next 12 months,” he added. 

In the short-term, amid the current labor shortage, Macron might focus instead on reforming the unemployment benefits scheme, with a proposal expected in the summer — a move which could get the backing of the conservatives but is likely to unleash the fury of left-wing MPs.

“There is no place in France where people do not tell you that they are looking for employees,” Macron said in his Bastille day interview, as he pledged to bring the unemployment rate down to 5 percent. France’s unemployment rate fell to 7.3 percent during the first three months of 2022, the lowest level since 2008 and is set to decrease even further to 7 percent by the end of this year, according to official estimates.

This is  “the most urgent structural reform,” a high-ranked government official at France’s economy ministry said, pointing to “a need to be encouraged to return to work.” 

But labor shortages and inflation also set the scene for social unrest this autumn as workers demand wage increases. And with some of the current handout schemes expected to expire by the end of the year, Macron may again be tempted — or forced — to do what France does best.