Add an entry to the list of troubles facing President Emmanuel Macron of France less than two weeks before pivotal legislative elections: potential financial penalties by the European Union for failure to rein in the nation’s ballooning deficit and debt.
The reprimand, announced Wednesday in Brussels, highlighted France’s fragile finances at a moment of political turmoil, as the far right National Rally party, led by Marine Le Pen, and a left-wing coalition, the New Popular Front, appear increasingly positioned to form a new government that could weaken Mr. Macron’s grip on power.
Mr. Macron threw French politics into disarray earlier this month by calling for snap parliamentary elections after his party was battered by the far right in European Parliament elections.
The fiscal warning by E.U. authorities set the stage for a possible confrontation between Brussels and Paris. Both the National Rally and the New Popular Front have pledged to spend more on public services at a time when Mr. Macron is being forced to find deep budgetary cuts of up to 25 billion euros ($26.9 billion) this year to improve the nation’s finances. The opposition parties, however, are critical of E.U. institutions, and want to ease rather than tighten fiscal policy.
France is in debt to the tune of around €3 trillion, or more than 110 percent of gross domestic product, and a deficit of €154 billion, representing 5.5 percent of economic output. The budget crunch comes after Mr. Macron spent heavily to support workers and businesses during pandemic lockdowns. His government also provided subsidies to help households cope with a jump in inflation after Russia’s invasion of Ukraine, which sent energy prices soaring.
E.U. rules typically require member countries to maintain budgetary discipline or face hefty fines if debt climbs above 60 percent of gross domestic product or if budget deficits reach more than 3 percent.
Those rules were suspended after the pandemic, when all European governments spent aggressively to shield their economies. But Brussels reinstated them this year and warned countries with sky-high spending to close the gap quickly or face a so-called excessive deficit procedure, which forces indebted governments to negotiate with Brussels or potentially face a fine.
France was not the only country reprimanded on Wednesday: Six others, including Italy, Belgium and Poland, were found to be in violation of the bloc’s fiscal rules. All those governments will start negotiations with Brussels, which can stretch for years, in July. Romania, which was warned about its deficit in 2020, was also singled out as not doing enough to fix its finances.
The rebuke from Brussels raises the stakes for the party that winds up taking power in France’s parliament after two rounds of voting that end on July 7. The National Rally, which supports a protectionist “France first” economic policy, could hold greater sway than ever, squeezing out Mr. Macron’s centrist party and throwing parliament into gridlock.
“None of these outcomes are conducive for fiscal policy,” Mujtaba Rahman, the European managing director of the Eurasia Group think tank, wrote in a note. “A far-right or united left government would actually widen the fiscal deficit.”
Mr. Macron had already ordered his government to start bringing its finances back into line. The European economy commissioner, Paolo Gentiloni, said Wednesday that despite the reprimand from Brussels, France was moving in the right direction.
But the political chaos that Mr. Macron unleashed by calling an election has spooked investors who had increasingly seen France as attractive for investments. They are now focusing on the prospect of instability if Mr. Macron is forced to govern alongside the National Rally’s top lieutenant, Jordan Bardella, a protégé of Ms. Le Pen’s.
Mr. Bardella has said that if he takes power, his first priority would be to address a cost-of-living crisis that has buffeted French households, primarily by slashing taxes on energy, gas and electricity at a cost of “several dozen billion” euros. He would also cut income taxes for French people under the age of 30 and encourage companies to raise salaries 10 percent, without charging them additional social security taxes.
Mr. Bardella this week backed away from some of his more costly pledges, including a plan to lower France’s retirement age to 60, after independent economists tallied the cost of his overall program at around €100 billion, shaking investors. French stocks slumped more than 6 percent last week before recovering some of their losses in recent days. The risk premium that investors demand to hold French government bonds over Germany’s, the eurozone’s benchmark, is near its highest level since 2017.
Investors are also concerned that the left-leaning New Popular Front coalition would throw financial caution to the wind with pledges to increase the minimum wage, cut the retirement age to 60 and freeze prices for necessities including food, energy and fuel. The party has said it would reject E.U. budgetary rules.
The French finance minister, Bruno Le Maire, said this week that the opposition parties would “open the floodgates of public spending wide at a time when we should be restoring our accounts.”
