Add one entry to the list of problems facing French President Emmanuel Macron two weeks before key legislative elections: possible financial penalties from the European Union for failing to rein in the country's ballooning deficit and debt.
The reprimand, announced in Brussels on Wednesday, highlighted France's fragile finances at a moment of political crisis, as the far-right National Rally party, led by Marine Le Pen, and the left-wing coalition, New The Popular Front appears to be in a position of rapid formation. A new government that could weaken Mr Macron's grip on power.
Mr Macron upended French politics earlier this month by calling for parliamentary elections after being defeated by a far-right party in European parliamentary elections.
A fiscal warning from EU officials has set the stage for a potential clash between Brussels and Paris. Both National Rally and the New Popular Front have pledged to spend more on public services at a time when Mr Macron is being forced to seek deep budget cuts of up to 25 billion euros ($26.9 billion) this year. In order to improve the finances of the country. Opposition parties, however, are critical of EU institutions, and want to ease rather than tighten fiscal policy.
France has a deficit of nearly 3 trillion euros, or more than 110 percent of gross domestic product, and 154 billion euros, representing 5.5 percent of economic output. The budget crisis comes as Mr Macron spent heavily to support workers and businesses during the pandemic lockdown. His government also provided subsidies to households to deal with a spike in inflation following Russia's invasion of Ukraine, which drove up energy prices.
EU rules generally require member states to maintain budgetary discipline or face heavy fines if the debt exceeds 60 percent of gross domestic product or the budget deficit exceeds 3 percent. have to do it.
Those laws were suspended after the pandemic, when all European governments spent aggressively to save their economies. But Brussels reinstated them this year and warned countries with sky-high spending to close the gap immediately or face the so-called excessive deficit mechanism, which allows indebted governments to negotiate with Brussels. compels to do or possibly face fines.
France wasn't the only country reprimanded on Wednesday: six others, including Italy, Belgium and Poland, were found to be in breach of the bloc's fiscal rules. All those governments will begin negotiations with Brussels in July, which could last for years. Romania, which has been warned of a deficit in 2020, was also cited for not doing enough to fix its finances.
The rebuke from Brussels raises the stakes for the party that takes power in France's parliament after two rounds of voting ending on July 7. The national rally, which supports the protectionist “France First” economic policy, may gain momentum. , squeezing Mr Macron's centrist party and putting parliament into gridlock.
“None of these results bode well for monetary policy,” Mujtaba Rehman, European managing director of the Eurasia Group think tank, wrote in a note. “A far-right or united left government would actually widen the fiscal deficit.”
Mr Macron had already ordered his government to start getting its finances back in line. European Economy Commissioner Paolo Gentiloni said on Wednesday that France was moving in the right direction despite Brussels' rebuke.
But the political chaos unleashed by Mr Macron's election has spooked investors who had seen France as an attractive investment destination. They are now focusing on the possibility of instability if Mr Macron is forced to co-govern with top National Rally lieutenant Jordan Bardella, a protégé of Ms Le Pen.
Mr Bardella has said that if he takes power, his first priority will be to deal with the affordability crisis that has left French households reeling, spending “tens of billions” mainly on energy, gas and electricity. By reducing taxes at the cost of The euro will also cut income tax for French people under 30 and encourage companies to raise salaries by 10 percent without charging additional social security taxes.
Mr Bardella this week backed away from some of his most expensive promises, including a plan to lower France's retirement age to 60, after independent economists put the cost of his overall program at around 100 billion euros. Investors were shaken. French stocks fell more than 6 percent last week before recovering some of their losses in recent days. The risk premium that investors demand to hold French government bonds over Germany's euro zone benchmark is near its highest level since 2017.
Investors are also worried that the left-leaning New Popular Front coalition will keep promises to raise the minimum wage, raise the retirement age to 60 and freeze the prices of essential goods, including food, energy and fuel. With will throw financial caution to the wind. The party has said it will reject EU budget rules.
France's finance minister, Bruno Le Maire, said this week that opposition parties would “open the floodgates of public spending at a time when we must restore our accounts.”