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Macron’s deal with hard-Left puts France on a collision course with Brussels
A coalition push to block National Rally risks costing the country €200bn
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The resurgence of Marine Le Pen’s National Rally party (RN) in the French elections has grabbed headlines.
While investors had been focused on the prospect of a hard-Right parliamentary majority, exit polls suggest Le Pen’s party is on track for a shock defeat that could even see it pushed into third place by Emmanuel Macron’s centrist Ensemble bloc.
Still, President Macron’s decision to align himself with the Left may have more serious implications for the French economy.
Its New Popular Front coalition is a hastily arranged marriage of bickering greens, socialists and communists who are promising to bring in controls on food prices, reinstate the right to retire at 60, significantly raise the minimum wage and increase business taxes.
If these policies were ever enacted, they would cost the country billions of euros – and risk tipping the French economy into a bigger crisis than ever.
France’s Unbowed party, led by populist firebrand Jean-Luc Mélenchon, is the most radical of the lot.
His previous Leftist alliance fell apart over Mélenchon’s refusal to brand Hamas a terrorist organisation after its Oct 7 attack against Israel.
Mélenchon also recently compared the head of Lille University to a Nazi for cancelling a conference on Palestine at which he was due to speak.
Despite the controversy surrounding the hard-Left, France’s prime minister Gabriel Attal has appealed for voters to block Le Pen and the party’s prime ministerial candidate Jordan Bardella from securing an outright majority.
More than 200 candidates representing either the Left-wing alliance or Macron’s centrist bloc have withdrawn their names from the ballot paper to give their political rivals the best chance of beating the RN.
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Le Pen has pledged to cut VAT on energy bills, return the state pension age to 62 and exempt all under-30s from income tax.
But these proposals look fiscally tame compared with the Left’s manifesto, which vows to begin a “rupture” within 15 days of gaining power, tearing up seven years of reforms presided over by Macron.
Analysis by the Institut Montaigne think tank found that rolling back Macron’s deeply unpopular increase in the state pension age from 64 to 60 would cost €58bn (£49bn) a year. Capping the prices of gas, food and other essentials would cost €24bn, according to the institute.
The Leftist coalition has also vowed to increase the number of income tax bands from five to 14, with lower earners paying less tax. It will also restore the wealth tax abolished by Macron and increase inheritance tax.
In total, the NFP’s pledges are estimated to cost nearly €95bn a year once fully rolled out.
This is double the cost of National Rally’s policies of €48bn. Macron’s centrist plan suggests extra spending of around €15bn, the think tank added.
Economists at Citi said the NFP’s programme could “conceivably sum up to an additional €100bn to €200bn”, putting Europe’s second largest economy on a collision course with Brussels over tax and spending.
France is already struggling to cut its addiction to borrowing.
Its budget deficit widened to 5.5pc of GDP last year, missing its 4.9pc forecast. Economists have already warned that the country will miss a goal to reduce annual borrowing to the European Union’s ceiling of 3pc of GDP by 2027 and the country has already been reprimanded by Brussels in a move that could spark billions of euros in fines.
France’s borrowing binge has already pushed its overall debt burden well above the size of its economy.
Its debt-to-GDP ratio stood at 111pc at the end of 2023. Citi economists say this could rise to more than 125pc if New Popular Front takes power – a significant increase over only a four-year time horizon.
The prospect of a hard-Right parliamentary majority had already pushed the risk premium that investors demand to hold French debt to its highest since the eurozone debt crisis. The spread between French and German borrowing costs stood at its widest since 2012.
‘This would damage the strength of the EU’
However, Kristina Hooper, global market strategist at Invesco, says a government that included the hard-Left would be even more negative for France.
“This outcome would be the most negatively received by markets,” she said.
“It would likely result in the greatest fiscal largesse, causing French bonds to sell off. This would also damage the strength of the European Union, which could weaken the euro.
“Given the greater political uncertainty, we believe it would likely be negative for French and European equities as well as the euro, and would cause a widening of French and peripheral bond spreads versus Germany.”
While results from the first round of voting have all but ruled out a hard-Left majority, Citi added: “It would almost certainly stall any further fiscal consolidation and plausibly result in noticeably wider deficits.”
Macron has reportedly ruled out sharing power with Mélenchon, but several of his allies are floating the idea of a broad coalition of centrist MPs and Left-wing parties.
National Rally’s Bardella, who had been measuring up the curtains at the Hôtel Matignon as favourite to become prime minister, denounced what he branded an “alliance of dishonour”, telling France’s Le Figaro newspaper that Macron had “thrown himself into the arms” of Mélenchon, who runs a party he accused of anti-Semitism.
Even Mélenchon’s political bedfellows are uneasy about their coalition.
Raphaël Glucksmann, co-founder of the centre-Left Place Publique party, admitted its decision to form an alliance with the hard-Left was troubling.
“It was a difficult decision, and it’s not a marriage of love,” he said last month.
Current prime minister Attal made clear that the centre’s decision to withdraw candidates in favour of the New Popular Front did not mean they were joining forces with Mélenchon.
“There isn’t and there never will be any alliance with France Unbowed,” he said.
‘Strategy could backfire’
But analysts at Rabobank warned the strategy of France’s anti-National Rally parties joining forces to block the hard-Right might not pay off.
“This cordon sanitaire strategy could backfire in so far as it is seen as an attempt to stifle the interests of a clearly increasingly large disaffected sector of French society,” they said in a note to clients.
“A choice between far-Right and far-Left candidates, meanwhile, could simply see more centrist voters abstain.”
Meanwhile, business leaders are warning that France’s economic and fiscal health has been forgotten.
François Asselin, who leads France’s confederation of small and medium businesses, said Macron’s decision to dissolve parliament had already cost France “a quarter of growth”.
He told French TV: “The punishments from the markets will be immediate [if the hard-Left or hard-Right] take power.”