Macron’s reform package tested as French MPs approve €20bn inflation-fighting package – POLITICO

PARIS — France did what it does best: throw money at a problem. As the country grapples with soaring energy prices, 5.8% inflation and warnings of social unrest, France’s National Assembly on Wednesday voted a package of palliative measures worth more than 20 billion euros to ease the economic pain of households.

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

The package follows a warning early July from the Court of Auditors, the country’s public debt control body, on the precarious budgetary trajectory of public finances as President Emmanuel Macron’s new five-year term approaches.

And for its once-cautious, reform-minded president, spending is unlikely to stop with the passage of the bill of purchasing power, taking into account the demands of the new kingmakers in France: the far left La France insoumise, the far right Rassemblement national and the conservative Republicans. A sample of deputies both sides of the aisle, including some populists, now have enough leverage in parliament to complicate the president’s agenda.

“The most difficult thing is now, we have to make courageous political choices and not give in to the temptation to always spend more,” French Finance Minister Bruno Le Maire told reporters earlier this month. The Mayor has repeatedly ruled out going any further, despite criticism from opposition parties, who will be tempted to up the ante given their new grip on the National Assembly since the June legislative elections. If the debates in parliament in recent days – marked by loud protests and theatrical performances from the left – are any indication, tough policy decisions could face even stiffer resistance.

According to the French Ministry of Economy, the country will have spent more than 40 billion euros to support household purchasing power, taking into account the latest measures, as well as around 23 billion euros from October 2021. In absolute value, this is one of the largest amounts injected into the system by all European countries. And what causes concern in some corners is not the absolute amounts of government spending, but the direction in which it is headed.

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

With interest rates rising and recession fears looming, France’s high debt and deficit levels are a problem that can no longer be ignored. In 2022, the price of maintenance the country’s public debt is expected to increase by 12 billion euros, more than the budget of the French Ministry of Justice.

Macron now wants a reset. Coming to power in 2017, he portrayed himself as a pro-market disruptor who wanted to save €60 billion by cutting public spending and implementing controversial pension and unemployment reforms. But after dealing with social unrest led by the Yellow Jackets movement, a major economic crisis triggered by the COVID-19 pandemic that required a “no matter what” approach, and inflation now in arrow unleashed by the war in Ukraine, the president had no choice but to increase public spending.

However, Macron’s orientation has not changed and his liberal program of economic reforms is back on the table.

“We are creating debt for our children. Do we have room for manoeuvre? No. We increased our debt during the COVID-19 crisis… But before that, our policy was one of fiscal prudence. We have to get back to it,” Macron said in an interview on July 14.

In a July 14 interview, Macron said spending during the COVID crisis has created “debt for our children” and that the country should return to a policy of “fiscal prudence” | Ludovic Marin/AFP via Getty Images

And while the government says it wants to get back to basics, large swathes of the country are moving in the opposite direction. A far more radical parliament has emerged from the legislative elections, with left and right opposition groups calling for a mix of costly grassroots measures such as a lowering of the retirement age and substantial caps on fuel prices. fuel.

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

And if the government thought their consensual set of donations would help them bridge the gap with the powerful left-wing Nupes alliance 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 apart… We wanted ambitious legislation on the cost of living, you gave us crumbs. We wanted an ecological transition, you gave us more carbon. You are making a historic mistake, our society is suffering and you are indifferent, ”said green politician Sandrine Rousseau in the group closing speech last friday.

Trouble on the horizon

With France posting solid growth levels and low unemployment following the COVID-19 pandemic, the outlook looks bleaker. Already big spender, France is struggling with a level of public debt at 118% of GDP, above the EU average of 88%, according to Eurostat.

France could continue spending without running into problems in Brussels, as EU rules on public spending are frozen until at least the end of 2023. The government has repeatedly said it will bring back the level of deficit below the EU threshold of 3% of GDP by 2027. and, in parallel, uses its political clout in Europe to ensure that once back, EU fiscal rules will be more permissive . France’s economy ministry predicted last week that the deficit would stand at 5% of GDP for 2022 and 2023, then decline to 2.9% in 2027.

But the prospects for controlling public spending also seem difficult.

“A very crucial element for the solvency of France is the stabilization and reduction of the debt burden,” said Sarah Carlson, senior analyst for France at rating agency Moody’s. With taxation in France already high, the main way to reduce debt would be to cut spending, she added.

As France pours out more money to help consumers ride out inflationary pressure, French officials have sounded a note of hope, believing growth will generate more taxes and help pay down the country’s debt.

“I hope we are experiencing a peak in inflation and that it will come down next year. We are trying to maintain growth,” said Jean-Réné Cazeneuve, rapporteur for the parliamentary finance committee. The government had hoped to replace existing fuel measures with a targeted program, although it had to abandon the idea of striking a deal with Les Républicains. However, this surgical approach could be followed for other support measures, which would be targeted to those most in need, said an official from the French economy ministry.

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

“The idea is to ‘smooth out the peak now’ and then focus on the long term,” he said, which includes money-saving reforms such as cutting public administration and raising the retirement age.

Easier said than done

Having lost an absolute majority in the June legislative elections, Macron’s plans are likely to face a deluge of opposition from a large cross-section of the French parliament, with slim hopes of success in bringing back the rump of the conservative Les Républicains party from his side. .

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

“So France will come out of this, without reforms and struggling to reduce its debt in the next 12 months,” he added.

In the short term, amid the current labor shortage, Macron could instead focus on reforming the unemployment benefit scheme, with a proposal expected this summer – a move that could win support from the Tories but which risks unleashing the fury of the left. – deputies of the wing.

“There’s no place in France where people don’t tell you they’re looking for employees,” Macron said in his Bastille Day interview, as he pledged to bring the rate down. unemployment at 5%. The unemployment rate in France fell to 7.3% in the first three months of 2022, the lowest level since 2008 and is expected to fall further to 7% by the end of this year, according to official estimates.

It is “the most urgent structural reform”, a senior government official told the French economy ministry, stressing “the need to be encouraged to return to work”.

But labor shortages and inflation have also set the stage for social unrest this fall as workers demand wage increases. And with some of the current subsidy programs set to expire by the end of the year, Macron may once again be tempted — or forced — to do what France does best.