Why France’s far right is shaking up the markets

Marine Le Pen’s big-spending populist plans to help poorer and working-class voters with tax cuts and promises to lower the pension age may have been easy to announce when her French far-right party was in opposition.

Now the National Assembly is waking up to the reality that these economic promises may be difficult to deliver if it takes power after a snap election and could turn into a Liz Truss-style liability on the campaign trail.

Rivals from President Emmanuel Macron’s centrist party have already jumped ship, warning that a debt crisis like the UK gilt market turmoil in 2022 could follow if they end up in a power-sharing situation with the RN, similar to the consequences of the plans of former British leaders. for billions in unfunded tax cuts.

Analysts have even said it could be worse: the impact from RN spending would be twice as painful as it would have been under Truss, inflating France’s deficit-to-output ratio by 3.9 points additional percentage per year, according to consultancy Asters.

Bar graph of the peak annual public deficit resulting from the measures (% of each country's GDP in 2022) showing that the RN program would have twice the impact on public finances of Liz Truss in the UK

Markets have already been rattled by the idea of ​​a far-right government running the eurozone’s second-largest economy with a protectionist and costly program at a time when public finances are already under strain.

Since Macron dissolved parliament on Sunday and called a snap two-round vote on June 30 and July 7, a shock response to his parties being swept by the RN in European elections, the gap between French and German government borrowing costs has widened. at the highest level since October. .

RN seems to have taken note. After railing against Macron’s unpopular move to raise the retirement age to 64 last year, RN rising star Jordan Bardella appeared to back away from the party’s oft-repeated promise to reverse the reform, which could add tens of billions in annual spending.

Well see, Bardella slipped up on RTL radio this week when asked if such a plan still stood, adding that Macron had saddled France with dusty deficits.

Marine Le Pen and RN rising star Jordan Bardella
Marine Le Pen and RN rising star Jordan Bardella, who this week appeared to back away from the parties’ pledge to scrap unpopular pension reforms Stephane De Sakutin/AFP/Getty Images

Le Pen has a number of other economic priorities aimed at easing the pressure on lower- and middle-class voters, such as cutting taxes on electricity and fuel bills and reducing VAT on a basket of essential food and household products .

Economists have condemned many of them as underfunded, incoherent and bent on adding to an already growing deficit. A study by the Institut Montaigne put a price tag of over 101 billion in additional spending per year on their program ahead of the 2022 presidential election. The RN disputes that figure, saying policies have evolved since then.

If it repeats the feat of garnering an unprecedented number of votes, the RN could end up in a strong enough position for 28-year-old Bardella to be named prime minister, forcing business-friendly Macron into an uncomfortable power-sharing deal. .

Even after abandoning ideas that shook markets a decade ago when Le Pen ran for president, such as leaving the Eurozone or even the EU, RN leaders have struggled to present a convincing economic program.

In the 2022 presidential campaign, they promised to exempt workers under 30 from income tax to combat the brain drain and to nationalize French highways to cut unpopular road tolls.

They also want to create a national preference for public procurement, which would be against EU single market rules.

On pensions, the RN once pushed for a retirement age of 60, but later suggested 62 for those starting work at a young age. Last year Macron raised it to 64, prompting months of street protests.

Funding these policies, the RN has argued, from plans to curb immigration and the benefits that migrants receive in France, including financial support when they are out of work or family aid for families without at least one French parent of the national government in that local will be shortened as well.

RN’s program is a pure opposition platform, a freebie for those with legitimate or illegitimate grievances. It is not a program, said Olivier Blanchard, former chief economist at the IMF.

Gifts cost money. The money isn’t there…In any program, to say that funding will come primarily from eliminating fraud is a giveaway. So is the notion that anti-immigrant measures will bring in significant revenue.

A foreign investor in France said a major concern for many was whether a RN government would reverse Macron’s tax cuts and revert to a form of wealth tax that he abolished.

Market disappointments wiped about 10 billion off the collective value of French banks BNP Paribas, Société Générale and Credit Agricole, seen as proxies for the economy, in the two days after Macron called the vote. Motorway concession holders took a hit, as did energy companies such as Engie, big on the wind farms the RN wants to dismantle.

A senior official in Macron’s government said the strategy against the RN was clear: scare people into the economy.

What would happen to your pensions? They would no longer be able to pay them. What would happen to your mortgages? Macron said at a press conference on Wednesday.

But the far-right party has so far refrained from reacting. We don’t need the approval of people who are disabled themselves! They have accumulated a colossal debt, RN General Secretary Renaud Labaye told the Financial Times last month.

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Le Pen has sought to turn the tables on Macron over his poor management of public finances, including in a column in business daily Les Echos earlier this year in which she called the French government’s mounting debt situation a national emergency.

Under Macron, the deficit exceeded its target of reaching 5.5 percent as a share of economic output last year, above the 4.9 percent expected as tax revenues fell short of government expectations.

After major spending programs to protect the economy from the Covid-19 pandemic and a European energy crisis, ministers have promised cuts to try to put France on track for an EU target of 3 percent by 2027 , although analysts and credit rating agencies such as S&P Global are still cautious.

The following graph of general government net debt as a percentage of GDP shows that French public debt has been on an upward trend since the financial crisis

From Paris’s business elite to smaller companies, concerns about RN’s plans are widespread, even among some who argue the party is sometimes treated unfairly.

Their economic policy is extremely bad. Supporting economic nationalism is not extremist, it is not dangerous, it is not particularly racist, it is just a bad idea economically, said Sophie de Menthon, head of Ethic, a French small business lobby group.

Not all analysts are convinced that the RN’s lackluster attack on the economy will resonate, given how attractive the far-right’s core message is: relief for strained household budgets.

Driving a car and heating a home were becoming luxury goods, Bardella said this week, highlighting a key promise to cut value-added tax on fuel, electricity and gas from 20 to 5.5 percent.

They are navigating something that many people don’t seem to understand, that there is something irrational about voting for the RN, said Jean-Yves Camus, a political scientist with the Jean Jaurs Foundation.

The question is not so much which is the most competent party(ies) …people want to be able to dream a little, to be told that things can change.

Additional reporting by Ben Hall in London

Video: Why the far right is growing in Europe | Film FT

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