French markets wobble as EU Commission launches deficit procedure

France’s financial markets lost further ground on Wednesday (19 June) after the European Commission announced it intends to open an excessive deficit procedure (EDP) over the national budget, exacerbating fears that the ongoing political reshuffling may compound the country’s economic headwinds.

The Commission confirmed today it will recommend France and six other EU countries (Belgium, Italy, Hungary, Malta, Poland, Slovakia) to take corrective action after they were found to breach the deficit and debt ceilings set under the bloc’s fiscal rules.

“Based on data validated by Eurostat, France’s general government deficit increased from 4.8% of GDP in 2022 to 5.5% in 2023,” the Commission said in its assessment.

Meanwhile, “public debt-to-GDP has edged down somewhat with the recovery in GDP since 2021, to just over 110% in 2023 [and] is projected to remain broadly stable in 2024, but to increase again in 2025 amid continued large government deficits,” it noted.

“The policy response to the identified vulnerabilities related to competitiveness in a context of low productivity growth has been broadly appropriate and should support productivity growth in coming years, but efforts need to continue,” it said, stressing the need to “reduce the high public debt”.

The Commission will propose its detailed recommendations for the affected countries in July – and these will then need to be discussed, amended and confirmed by the bloc’s 27 finance ministers by November.

Financial markets continue to react to heightened uncertainty

The Commission’s announcement comes just as the country entered unchartered territory after President Emmanuel Macron dissolved the National Assembly and called snap legislative elections as the far-right Rassemblement National (ID) sealed a sweeping victory at the European elections.

The news dented the French government’s claim that public finances are under control and impacted the markets. After recovering over the weekend, France’s main stock market index, the CAC 40, was down by 0.7% as of 12:40 CET on Tuesday.

Shares of the country’s 40 largest companies had already taken a deep dive at market opening on 10 June, tumbling by over 2% compared to the previous Friday’s close.

The CAC 40 continued to drop as the country’s political landscape kept moving ahead of the 30 June national elections  – losing an overall 6.2% from between 10 and 14 June, in the largest drop since the start of the war in Ukraine in February 2022.

The country’s bond spread over the German Bund closed last week at 75 basis points, the highest level since 2017.

The overarching fear of the French business community is that political instability – more specifically, the growing likelihood of a far-right government led by Marine Le Pen and Jordan Bardella’s RN party – will exacerbate the country’s fiscal position.

Analysts quoted by FT predicted that a victory by Rassemblement national could result in a further annual increase of 3.9 percentage points in the country’s deficit-to-GDP ratio because of tax cuts and the lowering of the retirement age they promised.

Polls are currently projecting the RN could gain a whopping 35% at the elections, an extra two percentage points to the 9 June European results, where they smashed Macron’s list.

France’s economic prospects on the line

The EDP’s activation comes as France failed to abide by its debt and deficit reduction targets, set a year ago for the 2023-2027 period.

Economy Minister Bruno Le Maire presented a deficit of 5.1% of GDP in 2024, a far cry from his original target of 4.4% – and far above the 3% ceiling enshrined in EU treaties.

The far-right has been hitting hard on the government’s failure to redress the economy, describing “an economic reality of near-bankruptcy,” he told daily Le Parisien. Should Bardella become prime minister, his stated ambition is “to bring back order in public finances and the streets of our country”.

But concerns run high that economic proposals from the left or the right would amount to more public spending and a bigger deficit, the government argues.

Bardella has called for a VAT cut on electricity, gas and fuel from the current 20% to 5.5% – a move deemed to be in breach of EU law – while salaries would be upped by 10%. He also said he would revisit the 2023 pensions reform, which pushed the legal retirement age to 64, and bring it back to 60 years, under certain conditions.

The new left coalition ‘Front populaire’ would do away with the pensions bill altogether, for an alleged cost on public finances of €20 billion, implement a new wealth tax, increase the minimum wage to €1600 net of tax,  peg civil servants’ pay on inflation, put a price cap on basic necessities, including foodstuff, energy and fuel – and offset it all with a more aggressive fiscal policy towards the rich.

An unlikely coalition between the Macron camp and the left or the right, or a hung parliament, would further prevent the adoption of any fiscal consolidation plan the Commission will be asking for.

Le Maire told French newspaper Le Monde on Tuesday (18 June) there will be a “debt crisis” should the far-right or the Front populaire get to higher office in three weeks.

“Opening the public spending floodgates at a time when we should be restoring public accounts will lead France to being placed under supervision from Brussels and the International Monetary Fund,” he added, refuting any claims the situation is not under control: “The French economy is solid”.

France was first subject to an excessive deficit procedure in April 2009, while its budget plans finally got the greenlight by EU legislators in 2018, when the procedure was revoked.

[Additional reporting by Giada Santana]

[Edited by Zoran Radosavljevic]

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