Blog: You, us, everyone

The president of France, Emmanual Macron, called for a snap election after his party lost voters in favor of the far-rightist-oriented RN. Next Sunday, electorates head to the polls for the first round with the second to follow on July 7. As of now, estimates indicate no absolute majority for RN nor the joint forces of far-left-oriented LFI and the Socialist Party. French voters are unsettled and there is a great lack of loyalty. Oftentimes and when there is a rare opportunity to express their opinion, French voters don’t vote for the program of either party but rather they punish the existing government for some past decision, irrelevant whether they were good or bad. 

What’s at stake?
As of now, research suggests that there is a possibility that the far-right National Rally could win a majority, or even an absolute majority with the help of some disoriented center-right to right-wing people, in the national Parliament. That would represent the end of a postwar absolute taboo in France against the far right attaining the highest government offices.

French people tend to express their dissatisfaction in the street and calling a snap election a little less than 3-weeks before the Olympic Games is a high-risk strategy implemented by the president. The general opinion in France is that they want change. The general atmosphere is one of anxiety, bewilderment, and tension. The leftish-oriented voters are concerned about the far right, while the financial market is highly concerned about a leftish-oriented government. What is worse for the country in the long run? The future will tell us.

The most likely outcome is that the President needs to work with a Parliament dominated by the National Rally, with a disobedient and an ultra-dogmatic large far-left presence, while his party and his relative power in Parliament are reduced to zero.

How did France end up in this chaos?
When taking a broader-based look at the social system implemented in France, one can observe a little misalignment that go back to the period of François Mitterrand. 

Under his presidency, key measures included nationalizing financial institutions and key industrial enterprises, introducing interprofessional minimum wage (SMIC), and the baccalaureate for everyone, or expressed differently, the same thing for everyone, except for the few elected people. His approach was very much inspired by the communist party defended dogma.

Technically speaking minimum compensation and raising the educational level for all students were excellent decisions. Yet, once translated into the field, the results were disastrous. Example: a large part of the French population is employed under the same protective SMIC schema with little opportunity of evolving and gaining more in a new function. In the case of Education, to maintain a satisfactory completion rate, educational attainments were constantly reduced and today, the certificate is almost valueless, but it is, because of an ultra-dogmatic approach, still the point of reference.

Ever since the creation of the Euro, France has run budget deficits greater than the EU-mandated 3%. In hindsight, when the Union was set up in 1990, the French politicians created found foundations for today’s disorder. It is a little-known fact that France rejected Germany’s call to implement a more complete political union. Against the voice of everyone, France was very eager to retain a high level of sovereignty over its finances.

More, France was benefiting, as a founding member of the European Union, from some leeway about the bloc’s budget rules. In 2016, Jean-Claude Juncker supported the application of the exceptional treatment by saying: “Because it is France”! The present government has started to address the most critical issues, i.e. making some long-awaited reforms to the pension system by pushing the retirement age from 62 to 64 which resulted in social and political unrest.

Let’s go back to the special treatment and its follow-up consequences. The incident resulted in a two-tier system, the once that can and the ones that can’t. As a result of the FC 2007/2008, the more indebted nations such as Greece and Portugal underwent some difficult government restructuring and austerity processes to reestablish the GDP to-debt ratio. These changes, while painful, proved correct in the follow-up of COVID.

Little room to really make thing quickly great again

Ever since, France got stuck with a very high debt-to-GDP ratio, which it can’t bring down. It looks as if the fortune has turned the other way round, Greece and Portugal are in a much better financial situation. In the case of Portugal, growth is back to annual average of 2.7 % (based on the last 12 years) whereas, in France, GDP is flat at 0.6% (average for the same period). One can argue that GDP growth is interlinked with General Government Debt, expressed in percent of GDP. Since this is partially true, one might compare the latter figure too. In the case of France, the debt-to-GDP ratio rose from 85.25 % in 2010 to 111.67 in 2022, while the one of Portugal increased from 11.21 to 116.05 during the same period.

In essence, the conclusion is that the quality of growth in Portugal is more sustainable and of better quality than the one of France. These findings are truly alarming and require deeper changes. 

This weekend’s snap election produces the kind of opportunity. The new parliament set-up is not only required to fix the lack of growth but also to clarify the relationship with other European capitals. Any misstep is expected to test the very foundations of the European Union set-up. Furthermore, the IMF is questioning France's fiscal credibility and how it will reduce a budget deficit running at around 5.1% this year.

The leaders of the far-right and the far-left parties insist that their costly spending promises are not expected to blow up the French budget. Yet, their promises might not be sufficient to fall inside the eurozone's newly minted budget rules. More importantly, all things equal, France’s refinancing costs are expected to rise since in the coming months, a mind-blowing $66 billion of French debt is expected to be changing hands. In fact, the rising risk of political turmoil and the recent rating reduction by the key agencies, which in turn will put strain on France’s Central bank when raising new debt, will increase the cost of borrowing. Ultimately, France will not be able to continue to ignore the rules of the ECB, unless it intends to jeopardize the future of the Union.

Why should one re-experiment with failed political strategies
While the background is slightly different, observers mention two examples: a) Greece: the left-wing government was brought to its knees by financial because of its budget mismanagement and constant overspending, and b) Great Britain: Prime Minister Liz Truss was forced to resign after unveiling an extravagant budget plan that unnerved investors.

Research suggests that the ECB has the tools to stem the first wave of contagion from a potential French crisis by buying bonds of other countries that do respect the EU's fiscal framework, meaning Paris might find itself isolated at times of need. But what comes afterward, is unclear for now.