Macron’s drastic miscalculation on the French national debt
Tim Wallace
16 min read
Macron
Emmanuel Macron never showed any doubt in the scale of his ambitions, nor his chances of success.
Less than a year after defeating Marine Le Pen in the presidential elections, Macron said he had come to realise a “special responsibility” fell to him to transform France and its relationship with the wider world.
“The responsibility of building a prosperous France, a France which is open to the world but also capable of recognising and accepting and including those left behind by globalisation,” Macron said in a speech in 2018 held in Davos.
Among his proposals were plans to overhaul the welfare system, taxes, finance and education. The state would be slimmer, the economy stronger, the people more prosperous.
But beyond mere policy changes he also sought to transform the soul of the nation.
Getting into his stride in his first year in the Elysée – the first and only elected role he has ever held – the youthful head of state was entering his “Jupiterian” phase.
“Cultural change… is just as important as tangible reforms, laws and decrees,” he said at the Swiss resort.
From attitudes to risk and enterprise to the approach to work and benefits, he promised a historic change to the way the people of France behave and engage with the world.
The president’s approach to leadership, deemed aloof, was easy to mock. Cartoonists delighted in portraying Macron as Napoleon, drawing echoes with the Emperor’s boundless ambition and physical stature.
France was in Germany's shadow when Macron won power - REUTERS/Philippe Wojazer
But it is harder to argue that France did not need a reset.
Macron promised to dispel the “misgivings, fears over globalisation” which he said had driven so many of his compatriots to the far-Right.
France had spent the best part of two decades in the shadow of Germany, which had undertaken its own economic transformation to shake off its old image as the “sick man of Europe” to emerge as the dominant political power and a seemingly unassailable industrial titan.
Fast forward to the present day and Macron is still promising a much-needed revitalisation of France.
Germany has stumbled, tripped up by the pandemic which hammered demand for its goods in China and then held down by the war in Ukraine which punished Berlin’s reckless reliance on cheap Russian gas.
Italy and Spain have emerged with more momentum. Even Greece, the basket case of the eurozone crisis, has come back strongly.
For all his promise as the vanquisher of the far-Right, Macron held off Le Pen by a smaller margin when he was reelected in 2022.
His party, rebranded as Renaissance last year, now trails her National Rally in the polls by a considerable margin.
Macron cannot run for a third term, so another candidate will be needed for the country’s elections in 2027. Meanwhile neither the Socialists nor the Republicans, the parties which have traditionally produced presidents, are in sight.
It all started so promisingly.
The month Macron declared victory over Le Pen, in May 2017, France’s unemployment rate stood at almost 10pc.
In contrast, this figure was 4.4pc in the UK and 3.6pc in Germany during the same period, according to the European statistics office Eurostat.
A cornerstone of Macron’s vision for France was to bring this number down and ensure more people would be in work and for a greater number of years.
Early on, he pledged to bring down the unemployment rate to 7pc.
This has largely been an area characterised by success more so than failure, says Andrew Kenningham from Capital Economics.
“He’s been very successful with the labour market reforms, so the employment rate has risen very sharply,” says Kenningham.
“France has been an outlier in Europe in seeing employment growth. That’s largely because of the apprenticeship scheme, which has brought in a lot of younger people to the labour force.”
The latest monthly unemployment figure from February stood at 7.4pc - down more than two percentage points from when Macron took office.
While critics would highlight that some of this decline is the result of reforms by successive governments over many years, Macron can afford to take some credit.
His policies have made it cheaper for firms to sack workers and have also slashed business taxes by €10bn (£8.6bn) to incentivise hiring.
Macron’s push to get more young people into work has also paid dividends.
The share of 15 to 24-year-olds in work was at a record high of 35.3pc at the end of last year, with comparable data stretching back to 2003.
But like other leaders before him, France’s youngest ever president has found his ambition to overhaul the economy tested by voters’ tireless willingness to protest.
Many of Macron's reforms have been plagued by furious protests - Mohamad Salaheldin Abdelg Alsayed/Anadolu via Getty Images
“In France they have this repeated problem of governments setting out with really good intentions to reduce the deficit and then being unable to do so,” says Kennington. “Part of the problem is that they have got embedded very high levels of social welfare payments.”
France’s tax burden is the highest in the OECD, a club of mostly rich countries. Tax revenues as a share of GDP stood at 46.1pc in 2022, ahead of even countries like Norway, Denmark and Sweden.
Analysis by the International Monetary Fund suggests that the bulk of excess government expenditure compared with similar economies is on pensions and unemployment benefits.
Reducing these types of spending has proved to be political dynamite.
“Those benefits were established mainly back in the 1990s. Once you’ve got them embedded it is very difficult to roll them back,” adds Kenningham. “Successive governments have made efforts to reduce those liabilities for the taxpayer, but only made some pretty limited progress.”
Macron came up against such forces early in his first term. He was forced to abandon plans to increase fuel taxes in late 2018 as a peace offering to the gilets jaunes movement.
The protesters were behind the worst French riots in 50 years, sparked by anger over rising living costs and inequality.
Macron, nicknamed the Mozart of Finance, then attempted to take on France’s generous pension system a year later, but quickly ran into similar issues and was forced to ultimately shelve the plans.
Shortly after, Covid hit and the French president vowed to do whatever it took to shield the population through the pandemic, putting pension reforms to one side.
“He came back to the pension reforms in 2023,” says Kenningham. “But again they triggered very big protests. That resulted in the reforms being somewhat whittled down. They weren’t as radical as originally planned.”
Earlier this year angry farmers stormed Paris with their tractors and forced the government to scrap an increase in agricultural fuel taxes.
It marked a retreat from last year, after ministers had sought to boost the net zero transition by removing a fiscal advantage for diesel used by farmers to boost public coffers.
These hard-won economic reforms have not paid off as much as one might have hoped.
Growth in France has consistently disappointed forecasts since the pandemic.
In its first set of predictions after Russia invaded Ukraine, the International Monetary Fund in 2022 anticipated French GDP would grow steadily, if not spectacularly.
The story since has instead been one of steady underperformance.
Instead of growing by 1.4pc last year as hoped, the French economy only expanded by 0.9pc.
This year, the IMF expects the country to slow again, anticipating growth of 0.7pc – less than half the pace of expansion it had anticipated in 2022. That is below the eurozone average, as France is left in the dust by Spain’s impressive 1.9pc forecast growth.
The only consolation is that Germany is doing far worse, with a predicted expansion of 0.2pc.
A further headache for Macron is France’s borrowing, which had sustained it throughout the pandemic and the Russia-induced energy crisis.
On the IMF’s measures, the budget deficit ballooned to a peak of 9pc of GDP in 2020, sending the national debt spiralling from 97pc of GDP in 2019 to just over 110pc last year.
Macron indicated that returning to fiscal sanity is a matter of historic importance to him.
“We are creating debt for our children,” he said in July 2022. “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.”
However, controlling borrowing was tough enough even before the crises of recent years – no French government has run a budget surplus since 1974.
Getting back into the black, or even just getting to more sustainable levels of borrowing, is proving easier said than done.
The IMF predicts the budget deficit will stay above 4pc until at least 2028, leaving France further in the red than any of the other major eurozone economies.
French national debt will rise steadily, reaching 115pc of GDP before the end of the decade, the IMF predicts, even as Germany reduces its own borrowing back to below pre-Covid levels of 60pc.
The French government claims it can slash borrowing more quickly, getting the deficit down to 2.7pc of GDP by 2027.
But the High Council of Public Finances – the country’s grandly named equivalent of Britain’s Office for Budget Responsibility – is sceptical.
Even after the government cut its predictions for economic growth, the body said “the potential GDP trajectory adopted is overestimated”.
That bodes ill for Macron’s hopes of getting borrowing under control.
“The return of the deficit below 3pc of GDP in 2027 would require a massive structural adjustment between 2023 and 2027 which, according to the government, would essentially be based on an effort to save money on spending,” the officials said.
“Ultimately, the High Council considers that the forecast presented by the government lacks credibility and consistency.”
The 3pc threshold highlighted by the High Council is important. Eurozone rules demand that countries run deficits below this level, and the European Commission can put nations into its excessive deficit procedure if they fail persistently.
This is effectively a nannying exercise, watching over the government’s shoulder to force it back on to the straight and narrow.
Those rules were suspended in 2020 and, after much negotiation, are coming back into force. France looks set to be a test case for the new regime and Brussels’ willingness to enforce the rules.
Failing to meet such a basic requirement on a seemingly permanent basis undermines France’s status as a core authority within the eurozone, as well as posing a threat to the country’s wider financial position.
It is also a personal humiliation for Macron and his dreams to revitalise the French economy and state.
Economists place the blame on the combination of weak growth and the traditional French dependence on high government spending.
Erik-Jan van Harn, at Rabobank, says Macron made a promising start, but seven years after he entered the Elysée, France’s political norms appear to be reasserting themselves.
“It is kind of a cultural thing. People expect a lot from the government,” he says.
“Macron tried to get the public finances back on track again when he started in 2017. Initially, he actually did pretty well. He also had a lot of luck, because the French economy did pretty well.
“But then Covid hit, then the energy crisis and right now it is really the question [of] whether he can make the hard decisions.”
Prior attempts to improve public finances such as controversially scrapping a tax on wealth and instead taxing property and setting a flat rate of 30pc on capital gains appear to have failed to boost income by much.
The uncomfortably large deficit also reflects a cultural view on debt, says Kenningham.
“France’s political centre of gravity is different from that of Germany, for example,” he adds. “There, politicians compete to offer the most austere fiscal policy. They promise to keep to the balanced budget rule, their debt break, and that has a lot of popular support. In France, that’s absolutely not the case. You wouldn’t win elections by promising austerity.”
Bringing down the deficit is even more challenging because of the looming threat of war. While France has ramped up spending to boost its military capacities significantly, European leaders already acknowledge that more needs to be done.
Mabrouk Chetouane, at investment bank Natixis, says the fundamental problem is a lack of growth which has undermined tax revenues. He describes it as “the key explanation of this wipe-out” in government receipts.
“The French situation is the worst within the core countries of the eurozone,” he says.
Financial markets are becoming twitchy as a result.
Interest rates have risen globally in recent years, but the rate charged to the French government in financial markets has risen by more than that charged to Berlin.
It suggests international investors are not entirely happy at the prospect of funding a yawning deficit indefinitely.
It also means Paris must pay a disproportionately large interest bill on its debt, which is on its way to double the size of Germany’s national debt.
Critical verdicts are due from the credit ratings agencies.
Moody’s is updating its rating on France next week, while Standard & Poor’s will do the same next month.
The financial analysts at the agencies give their verdict on the stability of the governments’ debts, and markets take them seriously.
The ratings take the form of a grade. S&P’s ranking of France is currently AA, but with a negative outlook. Economists suspect a downgrade could well be on the way.
At its previous update in December, S&P said: “We could lower our sovereign ratings on France within the next 12 months if we believe budget deficits would not fall sufficiently to lead to a reduction of the general government debt-to-GDP ratio, or if general-government interest payments increase beyond 5pc of general government revenue.”
Fitch, another agency, downgraded France last year. At the time it warned “rising interest expenses will make fiscal consolidation more challenging”.
That is to say, higher borrowing has led to higher debt interest bills, which in turn make it harder for Macron to get the deficit back down again.
Imogen Bachra, an analyst at NatWest, says any downgrade will be unhelpful for the government.
“It doesn’t help sentiment. In an environment when you are already worried about debt risks and how much that might weigh on rates going forwards, a ratings downgrade only adds to that negative sentiment,” she says.
This is not a crunch moment of the type seen at points in the eurozone crisis – France is still a very secure borrower. Bachra says: “I wouldn’t want to overstate the risks. We are still far from the point at which you worry about a debt spiral, in the sense that their interest payments become so high they can no longer service their debt and it runs out of control.”
That may offer little comfort to a hard-pressed government.
Plenty of countries are borrowing heavily. The US is running a budget deficit of around 7pc of GDP per year, a vast sum outside recession or war, meaning France has to compete for finance from international investors.
If bond investors do not like what they see, they may turn up their noses at the prospect of funding Macron’s long-term deficits.
Financiers can be fickle, as Britain found out under Liz Truss’s premiership.
The French government’s proposed solution is to hold back spending.
So far it has unveiled plans to cut €10bn this year and twice as much next. Longer-term plans may end up with cuts of €50bn in 2027 – restraint which in turn risks hitting economic growth, in a painful, if necessary, cycle.
But there are a series of challenges which will make savings on this sort of scale distinctly tricky, says Thomas Gillet at Scope Ratings.
“Bringing everybody on board at all levels of public administration may take a bit of time. That is the first challenge,” he says.
“They will also need to implement difficult policy trade-offs. We all know France spends more than the rest of Europe on social protection, so they may want to cut social spending, which is another challenge in the current political environment.
“And the third point is that when we look at the stability programme, most of the consolidation efforts will be made by the government between 2025 and 2026. That may be challenging shortly ahead of the next general elections, in 2027.”
All of this has to be done without a majority in parliament, as Macron must now rely on the support of centre-right parties on an ad hoc basis to make any further serious changes.
Even if he can push the plans through parliament, there are dangers.
As interest rates hammer the budget with higher borrowing costs, the fear is that spending cuts risk undermining economic growth. In turn that hits tax receipts again.
“It is a vicious circle,” says Natixis’s Chetouane.
“We need to learn from what the US did, and what the eurozone did with Spain and Italy.”
That means borrowing to invest in growth, he suggests, rather than less productive spending.
The coming months include a series of critical tests for the president.
European elections in less than two months will allow voters to give their verdict on Renaissance, as well as a renewed platform for Le Pen to draw in supporters.
Then the Paris Olympics will showcase the country on the global stage in late July and early August.
The opening ceremony should give the President a chance to position himself at the front of the festivities, showing off France at its glittering best.
But he has already been forced to make some concessions to tighter security arrangements amid terror attack fears.
Last week he acknowledged the existence of contingency plans which could further slim down the opening ceremony, planned to take place along the banks of the Seine.
Recent photos released by the official presidential photographer showed Macron boxing, grimacing as he pummelled a punchbag, veins bulging in his arms.
The black and white images seemed designed to show a grittier, more determined side to the president.
He will need every ounce of his tenacity if he is to bounce back this summer, and make good on his early promises to revitalise the nation.
