France’s Legislative Elections: A Far-left Majority Would Exacerbate Credit Challenges

The possibility of a coalition between the French Socialists, Greens, Communist Party and other far-left groupings challenging President Emmanuel Macron for control of the National Assembly has risen after a first round of legislative elections on Sunday.

However, opinion polling suggests gains made by the New Ecological and Social Popular Union (Nupes) will probably fall short of a desired majority after this Sunday’s second-round vote. It remains Scope Ratings’ baseline that Macron will instead obtain a parliamentary majority, although not necessarily an absolute one.

Even so, political fragmentation in the country, with extremists on left and right emerging as prime alternatives to Macron’s centrist Renaissance party and its Ensemble coalition in parliament, has made the outcome of legislative elections more unclear, with potential adverse post-electoral consequences for French public finances.

An unexpected victory for the far-left coalition would present two main economic consequences for France:

1. Political antagonism would prevent implementation of structural reform

Reforms proposed by the Macron government in 2017 before being hindered by the Covid-19 crisis and popular opposition (gilet jaunes) were promising as far as addressing France’s long-standing credit challenges, such as rising public debt, declining economic competitiveness, slowing productivity growth, residual labour-market rigidity and an ageing population.

Remaining reform momentum would slow if not stop altogether given Nupes’ opposition to many planned reforms, such as pension reform, in addition to the grouping’s hostility as far as closer cooperation among EU member states – a core plank of Macron’s foreign policy.

2. Expansionary fiscal policy would add to pressure on fiscal dynamics

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

This would result in a permanent increase of public expenditure (which amounted to 59.0% of GDP in 2021), which is already high once compared with euro-area averages (53.7% of GDP in 2020). This would as well reduce the likelihood of fiscal consolidation in achieving smaller fiscal deficits (the deficit stood at 6.4% of GDP in 2021) at a time during which funding fiscal imbalances is likely to become increasingly expensive as the ECB raises rates.

Overall, limited progress on structural reform, continued pressure on structural budget deficits, and rising rates would apply further upside pressure on French public debt (which amounted to 112.5% of GDP in 2021) and widen divergence in this respect with the performance in euro-area peers (the bloc averaged government debt of 95.6% of GDP in 2021).

According to Banque de France, the interest burden could reach around 2-3% of GDP per year by circa 2030, up from around 1% of GDP in 2021 (Figure 1). This represents a sharp increase after a recent period of very low rates, although the interest burden of France would nevertheless remain in line with its long-term average.

Figure 1. Interest burden: still below long-term average, but a rise is coming

EUR bn, % GDP

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Thomas Gillet is an Associate Director in Sovereign and Public Sector ratings at Scope Ratings GmbH.