An uncertain economic and political outlook and increasing financial constraints will weaken France’s ability to push for greater EU financial integration as well as its ability and willingness to provide military and financial support to Ukraine. Following the poor performance of his party-political alliance in the June EU parliament elections, President Macron called snap parliamentary elections. Polls suggest that the far-right Rassemblement National of Marine Le Pen will emerge as the largest political party, but fall short of an absolute majority. The first round of national parliamentary elections will take place on June 30. The second-round run-off will take place on July 7. The RN is currently projected to win the largest number of seats, but is likely to fall short of an absolute majority. The RN is projected to win around 250 seats, up from 88 seats previously, but well short of the 289 seats needed for an absolute majority. If right-wing Republicans support the RN, it might end up controlling a majority of seats in the national assembly and supply the prime minister.
The next prime minister will hail from the far right. Centrist, pro-European President Macron will then govern France together with a EU-skeptical, far-right prime minister in an arrangement known as cohabitation. This would sharply diminish the prospect for a much-needed, multi-year fiscal adjustment as well as structural reform during the remainder of Macron’s second and final term as president. Against the backdrop of low economic growth and continued large fiscal deficits, government debt will continue to increase. If the RN makes good on its pre-election promises, the fiscal outlook will deteriorate even further. In a worst-case scenario, this could lead to a loss of investor sentiment and near-term financial instability, even if the RN is unlikely to want to push France into a financial crisis given its hope of winning the presidency in 2027.
France’s financial position has worsened in the past 10-15 years and will continue to do so in the next few years. French government debt increased from 85% of GDP in 2010 to 110% of GDP in 2023. This represents a major increase. Last year, the deficit reached 5.5% of GDP. Such a large deficit is incompatible with a stable debt-to-GDP ratio. The 2024 deficit target is 5.1% of GDP. The government was planning to cut spending to meet the target. Among the OECD countries, France has the highest level of government expenditure at around 58% of GDP. On May 31, international rating agency Standard & Poor’s lowered France’s sovereign credit rating from AA to AA-. Last year, France’s fiscal deficit reached 5.5% of GDP, overshooting its original target of 4.9% of GDP due to a shortfall of tax revenues and continued high post-COVID government expenditure. Before the president called new elections, the French government of PM Gabriel Attal was committed to reducing the deficit to 3% of GDP by 2007. This was always going to be ambitious in the context of modest-to-average economic growth in 2024-27. This deficit-cutting plan is now at risk, as the RN supports tax cuts and even supports lowering the retirement age. The far right supports tax cuts on electricity and fuel as well as VAT reductions on basic food stuff and household products. It also expressed support for lowering the retirement age for certain workers, even though it appears to have backpedaled somewhat recently. Private sector economists put the total costs of RN spending plans at around 4% of GDP. If such a spending increase were to be implemented within a short span of time, the risk of a financial crisis would increase significantly. But even the mere failure to cut public spending in the coming years, as opposed to increasing it or reducing revenue, will increase investor concerns and force France to pay a higher risk premia on its debt. French spreads over German bunds, a measure of relative risk, have increased from around 50 basis points before the European parliament elections to 75 basis points. This is not dramatic and will not lead to any immediate financing difficulties. But it is indicative of increased investor nervousness about the outlook for economic and particularly fiscal policy.
A far-right government will be more likely to pick a fight with the Commission over EU fiscal rules, not least because cutting spending and raising revenue will reduce its chances of winning the 2027 presidential elections. Following the decision to call snap elections, the political conditions for continued fiscal consolidation have worsened and the risk of an even looser fiscal policy have increased. The outlook for structural reform in the next three years is poor. Worse, if the RN makes good on some of its economic promises, budget deficits would increase, interest rates would increase and economic growth would weaken. A clash with the European Commission would become inevitable, and the RN might relish a confrontation with the EU to burnish its EU-skeptical credentials, even if has an interest in avoiding a financial crisis. Markets would not take kindly to such a conflict.
The EU Commission has just put France on notice over its non-compliance with EU fiscal rules and France will almost certainly be put under the so-called excessive deficit procedure in autumn. France would then be obliged to implement a fiscal adjustment. This could set a new RN-led government up for a conflict with the Commission, further adding to economic and financial uncertainty. Such a stand-off is unlikely to get resolved overnight and would thus face to prolonged financial uncertainty without necessarily triggering a broader loss of market confidence. Again, the RN has an interesting avoiding broader financial volatility.
If the next government fails to put the fiscal house or if it increases rather than decreases public spending, France’s influence with respect to EU economic policy will diminish further. France has generally been supportive of greater fiscal integration and financial risk sharing. But with France, as the euro area’s second-largest economy, weakening financially, the financially stronger EU members will be even less inclined to agree to further integration than before. It will diminish France’s voice on issues ranging from capital markets union over an EU industrial policy. The fact that the RN and the president will not see eye to eye on many EU economic issues will weaken France’s position further. Meanwhile, opposition to financial risk sharing and industrial policy remains strong, and it remains to be seen if a RN-led government would take any interest in further capital markets integration. More likely, the RN’s focus will be on domestic policies and, if anything, it will be critical EU-level integration or policy coordination.
Financial constraints and the new government's focus on domestic issues will also weaken French support financial support for Ukraine, which will weaken France’s standing among Eastern European EU members (except Hungary and maybe Slovakia). Much needed fiscal adjustment will make it more difficult to raise defense spending. Politically, the RN will be reluctant to be seen as providing substantial financial resources to Ukraine. Both France’s ability and its willingness to increase support for Ukraine would be limited. France has thus far only provided relatively limited aid to Ukraine. According to the Kiel Institute of Economics, since early 2022, France has provided EUR 11 billion worth of bilateral and EU aid to Ukraine, compared to the UK’s EUR 13 billion and Germany’s EUR 23 billion. France has provided EUR 2.7 billion of aid to Ukraine, compared to Germany’s EUR 10 billion. Economically much smaller Poland has provided more military aid to Ukraine than France (EUR 3 billion). A further reduction would weaken its standing in the eyes of Eastern European EU members, who will continue to look primarily to the United States and secondarily to Germany to shore up support for Ukraine.