France’s legislative elections: a far-left majority would exacerbate credit challenges

Far-left parliamentary majority in France would aggravate rather than meet the challenges facing French public finances, with expansionary fiscal policy partly funded through borrowing which would become increasingly costly as interest rates rise.

By Thomas Gillet, Associate Director, Sovereign and Public Sector Ratings

The possibility of a coalition of Socialist, Green, Communist and far-left parties achieving such a breakthrough and challenge President Emmanuel Macron for control of the National Assembly has increased after the first round of the country’s legislative elections on Sunday. However, opinion polls suggest gains made by the New Ecological and Social Popular Union (Nupes) will likely fall short of a majority after next Sunday’s second-round vote. It remains our baseline that Macron will obtain a majority, though not necessarily an absolute one.

Even so, political fragmentation in France, with extremes of left and right emerging as main alternatives to Macron’s centrist Renaissance party and its Ensemble coalition in parliament, has made the outcome of the legislative elections more uncertain, with potentially adverse consequences for French public finances.

A victory of the far-left coalition would have two main consequences for France (AA/Stable):

1. Political antagonism would prevent the implementation of structural reforms

Reforms proposed by Macron’s government in 2017 before being hindered by the Covid-19 pandemic and popular opposition (gilet jaunes) had been among the most promising to address France’s longstanding credit challenges, including rising public debt, declining competitiveness, slowing productivity growth, residual labour market rigidities, and an ageing population.

Any remaining reform momentum would slow if not stop altogether given Nupes’ opposition to many of the planned reforms, notably pension reform, in addition to their hostility to closer cooperation among EU member states, an important element of Macron’s foreign policy.

2. Expansionary fiscal policy would add pressure of fiscal metrics

The far-left coalition’s agenda includes an estimated increase in public expenditures of around EUR 250bn to 320bn (or 11% to 14% of 2021 GDP). Key measures include raising the minimum wage, lowering the retirement age to 60, freezing the price of essential goods and investment in renewables.

This would lead to a permanent increase in public expenditures (59.0% of GDP in 2021) that are already high in comparison to euro area average (53.7% of GDP in 2020). This would also reduce the likelihood of fiscal consolidation to smaller fiscal deficits (6.4% of GDP in 2021) at a time when funding fiscal imbalances are likely to become increasingly costly as the ECB raises interest rates.

Overall, limited progress on structural reforms, continued pressure on structural budget deficits, and rising interest rates would apply further upwards pressure on French public debt (112.5% of GDP in 2021) and widen the divergence with euro area peers (95.6% of GDP in 2021).

According to the Banque de France, the interest burden could reach about 2-3% of GDP per year around 2030, up from around 1% of GDP in 2021. This represents a sharp increase from the recent period of very low interest rates, though it would remain broadly in line with its long-term average.

Interest burden: still below long-term average, but rise is coming
EUR bn, % GDP