Policymaking difficulties emerge for a president keen on reforms.
French president Emmanuel Macron casts his ballot during the final round of the country's parliamentary elections in Le Touquet earlier this month. Photo: Reuters
As expected, president Emmanuel Macron's alliance Together! came first in the parliamentary elections, winning 245 seats, compared with 131 for the New Ecologic and Social People’s Union (NUPES), a collaboration of greens and socialists led by France Unbowed, Jean-Luc Mélenchon’s dominant far-left party.
Marine Le Pen’s far-right National Rally (RN) came third and is now the second-largest party in parliament, on 89 seats, with the centre-right party Les Républicains (LR) fourth, on 61.
For Macron it was a far from ideal outcome, with his alliance failing to achieve an absolute majority of 289 seats. Élisabeth Borne, the prime minister he appointed in May, tendered her resignation. The president rejected it, and implored her and her cabinet to carry on. At the same time, Macron pleaded with his opponents to work together in the national interest.
As Euromoney survey contributor and economist Norbert Gaillard, of NG Consulting, explains: “In his speech delivered on Wednesday evening, president Macron suggested that NUPES, RN and LR must take their responsibility and explain what legislative texts they agree to vote for.”
Losing the majority is a massive blow to his ability to implement his reforms- Sebastian Bittar
This move will oblige Macron's opponents to develop constructive strategies, he says, adding: “However, an uncompromising opposition could prevent PM Borne from obtaining the confidence vote in a few days and thus lead to her resignation. In any case, the reforms promoted by President Macron will be delayed.”
For Sebastian Bittar, a risk analyst at Quantyx Advisors, it is a recipe for political paralysis.
“The last time the sitting president did not have absolute majority in the parliament was in 2000, and both Mélenchon and Le Pen have expressed their refusal to work with him,” he says.
Bittar notes the fact that while France is perceived as a democratic country due to its electoral system, it is unlike countries where the legislature is the decision-maker.
“In France, the French president has a lot of power" he says. “With a majority in the parliament, he can do anything he wants; it's his choice. Losing the majority is a massive blow to his ability to implement his reforms. It will be much harder.”
This occurs at a particularly tricky time, with France facing up to some challenging economic problems arising out of the war in Ukraine, and because of the cost of extraordinary stimulus to protect vulnerable groups during the pandemic.
Price pressure is lower in France than the European average, due to a higher share of nuclear energy and therefore less reliance on gas, plus the fact the government has introduced substantive measures to limit the increases.
Despite this, annual inflation measured by the harmonized index of consumer prices accelerated to 5.8% in May.
Prospective monetary policy tightening from the European Central Bank (ECB) is also pushing borrowing rates higher, affecting businesses and households alike, and as a consequence economic growth will be more subdued.
The latest forecasts compiled in Euro Zone Barometer, a monthly survey of independent experts, have been downgraded. Real GDP growth of 2.6% is now predicted for this year, before slowing to 1.7% in 2023. In the space of just two months, the forecast for household consumption growth in 2022 has been slashed from 3.5% to 2.5%.
NG Consulting's Gaillard does not see inflation exceeding 6% in 2022, thus remaining significantly below the eurozone average. However, trade unions and the popular and middle classes are “very anxious about the erosion of purchasing power”, he says, adding: “The Bank of France has just announced it [purchasing power] is forecast to decline by 1% this year. In fact, inflation is more a social than an economic problem.”
As Quantyx's Bittar points out, the trade unions in France are very strong due to their bargaining power, which is why structural unemployment is high. There is also a workforce skills mismatch.
Macron seeks to raise the retirement age (from 62 to 65 years), cut taxes for business and households, and encourage more people back into work, requiring unemployed people to undertake 15 to 20 hours per week of training.
He seeks to liberalize the economy, to make it more dynamic, much like the UK or the US.
Given the difficulties of passing legislation, Bittar now expects France to continue to experience a high deficit and debt, and high structural unemployment.
The country still has a sizeable fiscal deficit, and the sovereign debt burden is expected to hit almost 115% of GDP by next year, according to the latest forecasts from the OECD.
The French economy is more resilient than many other eurozone countries, but institutional and political risks are undoubtedly rising- Norbert Gaillard
For Gaillard, and given the fiscal risks, the key economic issue is the rise in borrowing costs as the 10-year government bond yield has increased by 200 basis points in the past six months.
This is a huge challenge, he says, because the ECB is likely to increase interest rates at least twice in the second half of 2022 and one of the priorities of the French government will be to preserve the credit position of the country.
What is more, although he does not expect a recession this year, in a context of persistently high energy prices, stagflation is a real risk for 2023. Bittar agrees that France is facing the risk of stagflation.
In the light of all this, all of the survey contributors are reassessing France.
Gaillard, for example, has downgraded four of the survey’s risk indicators: government stability, institutional risk, the labour market/industrial relations and access to capital markets, while upgrading two: employment/unemployment and monetary policy.
“I am confident that the ECB will take adequate measures to prevent a fragmentation of the eurozone,” he says. “The French economy is more resilient than many other eurozone countries, but institutional and political risks are undoubtedly rising.”
The first-quarter survey saw an erosion of confidence among Euromoney’s panel of experts and the second quarter is likely to be the same, extending a longer-term trend deterioration.
France is presently a tier-three (of five) investment, lying 41st in Euromoney’s global risk rankings, similarly rated to Kuwait and Cyprus.
Rising political risk means its relative position is under threat.