Catastrophic Stagflation: This Is How Macron’s Policies Caused a Crisis for the French Economy

Murad Jandali | 10 months ago

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France is preparing for political and social storms with the succession of economic crises and the high level of inflation, similar to many European countries affected by the rise in global energy prices due to the Ukraine war.

Instead of Emmanuel Macron’s government taking the necessary measures to absorb popular anger, by raising the minimum wage by a greater percentage and controlling the rise in prices, the French president raised the retirement age.

Macron has been trying to reconsolidate his presidency amid protests and strikes, focusing over the past month on announcing foreign investment and steps to stimulate France’s industrial sector, announcing billions of euros in new investment to encourage cycling and reform professional training.

On its part, Bloomberg Agency said in a report on June 1, 2023, that France’s Covid recovery plan delivered 100 billion euros in extra outlays, while measures to mitigate surging energy prices could cost around 40 billion euros and only be fully phased out over the next two years amid concerns about weakness in the public finances of Emmanuel Macron’s government.

France’s debt amounted to about 111% of annual output at the end of last year, and the French Ministry of Finance hopes that controls on government spending, along with faster growth, will reduce overall debt levels to 108% of gross domestic product (GDP) until 2027.

Fitch Ratings’ outlook at the end of last April was less optimistic, seeing that the French debt, in fact, increased to more than 114% during the same period.

 

Macron’s Efforts

Le Point magazine considered, in an article by writer and lawyer Nicolas Baverez published on May 29, 2023, that the entry of the French economy into a state of stagflation reflects the failure of the economic policy pursued by President Emmanuel Macron.

Baverez wrote that as the country grappled with multiple crises, President Macron had doubled the state’s debt by over 700 billion euros, not to re-establish a competitive bid, modernize the state or strengthen the nation’s resilience, but to distribute hypothetical buying power under the slogan at any price.

The writer indicated that Macron tried to buy the social ladder by distributing checks to families, starting with the yellow vest movement and ending with the reform of the retirement system, and contributed to accelerating the deterioration of the leading sectors in France, especially agriculture, health, the automotive industry, and construction.

He added that “Macron, in the name of preserving the environment, introduced French companies into a regulatory framework that kills activity and employment, noting that growth can no longer be based on increasing public debt, which is more of an obstacle than an engine.”

He stressed that “although the French economy grew by 0.2% during the first quarter, and recently attracted, during the Choose France summit, about 13 billion euros of foreign investment, France entered into a state of stagflation.”

The writer continued by saying that “the French economy is slowing sharply and is exposed to successive crises that may last for a long time, especially with the labor market losing many jobs due to the high rate of bankruptcy of French companies to 45% during the first quarter.”

In the same context, The Telegraph newspaper stated in a report on June 8, 2023, that the second-largest economy in Europe is going through an unprecedented financial crisis as a result of the policies pursued by Macron following the Corona pandemic, noting that the situation of the French economy was not in a way that allowed Macron to resort to a number of decisions that might seem harsh to the French people due to the repercussions of the Ukraine war as well.

In order to search for new investments that would enable him to proceed with the economic decisions he takes, Macron received last month billionaire Elon Musk—owner of Tesla, the leading electric car manufacturer—a warm welcome on the sidelines of the Choose France summit, according to the Elysee.

The French president is hoping to attract more investment in electric cars from billionaires like the Tesla boss.

According to the newspaper, Macron was in dire need of this investment push, which comes as part of his efforts to move forward with his plan to facilitate business movement in the country, while the French economy is struggling to get rid of its chronic addiction to spending.

Since taking office in 2017, Macron has cut business taxes and made it easier to hire and fire workers and harder for the unemployed to claim benefits amid other pro-business policies.

Macron himself pledged to protect French families from the financial burden of a pandemic lockdown, whatever the cost, and Russia’s invasion of Ukraine forced his hand again. But as interest rates rise to contain inflation, those costs are coming back to bite.

French families were shielded from the worst of a spike in energy bills after the government forced the Enterprise Development Fund (EDF) to cap prices at a loss. The power giant sued, but was eventually nationalized for 9.7 billion euros.

Macron also slashed the cost of filling up a car and handed out extra money to the poorest.

The moves saved French households from a lot of short-term pain, but left the state with little room for maneuver.

 

The Most Indebted Countries

France’s economy suffered another blow, which came at the hands of the major rating agencies.

In April, Fitch downgraded France’s credit rating from (AA) to (AA-) and placed it in the same rating as countries such as the Czech Republic and Estonia.

The agency furthermore indicated that it does not see a solution soon to the crisis of high public debt in the country, because political decision-makers are unable to rein in spending.

Fitch also highlighted the political risks posed by Macron’s recent efforts to raise the minimum retirement age, which has sparked mass protests and divided Parliament, making it difficult to garner support for future reforms.

In turn, Macron said, “the agency was making a profound mistake in its political analysis” in comments to the l’Opinion magazine afterward.

In response to Fitch’s announcement, French Finance Minister Bruno Le Maire told AFP: “We will continue to pass the country’s structural reforms.”

He pointed out, “The green industries bill, which will be submitted within days to parliament, will open new industrial sites and create new job opportunities.”

On the other hand, the head of the Republican Party, Eric Ciotti, in a tweet, attacked the reforms of the Macron government, saying: “Uncontrolled spending, record low industrial production, and inflation-linked loans confirm that France is spending more than it is producing.”

Meanwhile, Standard & Poor said on June 4 that France remained at risk of a downgrade before the end of the year, which could add to the country’s borrowing costs.

As well as, Ratings Cope, a European agency, put a negative outlook on its assessment of France last month.

After waiting for an update on its rating, on April 28, Moody’s credit rating agency did not announce anything, while S&P’s, which currently grants France an AA rating with negative future prospects, is supposed to publish its new rating on July 2.

France is currently the most indebted among countries in the same category (AA), with a public debt of about 3 thousand billion euros.

The size of France’s public debt represented 111.6% of GDP in 2022, and the French government hopes to reduce this proportion to 108% in 2027.

On the other hand, S&P’s said that the volume of public debt will remain above 110% of GDP in the period 2023-2026, with a continuing budget deficit despite its decline.

The verdicts put France in a club of countries that not long ago were associated with bail-outs and Brussels diktats. While France’s debt share is now projected to rise, Greece, Italy, and Portugal are expected to see their debts fall relative to the size of their economies.

The International Monetary Fund (IMF) had an even starker message for Paris: Carry on as you are, and debt will rise above 120% of GDP in the 2030s and will continue to grow indefinitely.

As a result, last April, Macron was forced to use exceptional constitutional powers to raise the retirement age from 62 to 64 years, but his decision was met with massive protests.

However, some observers claim that the protests subsided afterward and that some circles even accepted the reform decision, in recognition of the reality of the economic crisis, in addition to the difficulty of continuing the protests with the approaching summer vacation.

 

France’s Economy

Under President Macron, France witnessed many bumps and economic crises, represented by the rise in food and fuel prices, not to mention the strikes in several sectors and the acute shortage of cadres in the health and education sectors.

French annual inflation cooled more than expected in May to its lowest level in a year at 6.0% as energy and food price increases moderated. But food prices were still up 14% last month.

March saw a record spike of almost 16% in French food prices after food companies and big retailers agreed on an average 10% increase in prices, responding to a surge in input costs after Russia’s February 2022 invasion of Ukraine and to higher wages.

France is currently the most bloated state in Europe, with public spending at around 58.2% of GDP in 2022.

France has the highest level of public spending relative to the size of its economy of all countries monitored by the Paris-based Organization for Economic Co-operation and Development.

In addition, spending on social benefits such as pensions and public sector wages is more than 10% higher than in neighboring European countries.

The French economy, the second largest in the Eurozone, is expected to remain weak until at least next year, according to analysts.

In its recent health check of the economy, the IMF highlighted that “public debt has been trending up in the past four decades as France struggled to contain fiscal deficits... with significant debt ratchet effects as fiscal support was not fully unwound following crisis episodes.”

On the role of Macron’s policy in the deterioration of the French economic situation, economic researcher Firas Hakim explained in a statement to Al-Estiklal that “Macron’s policy played a major role in exacerbating the economic crisis in the country, as the replacement of cheap Russian energy sources with expensive ones greatly affected the French economy.”

Mr. Hakim added that “Macron’s domestic policy during his two terms is based on defending the interests of the rich and luring foreign investors by raising the slogan of re-industrialization, which will negatively affect weak sectors, employees and workers, in addition to that his efforts are based on borrowing that will lead to more inflation.”

The researcher pointed out that “French Minister of Economy Bruno Le Maire (54 years) is also a writer, and he had written five books during his assumption of the economy portfolio under Macron’s rule.”

Mr. Hakim added, “Le Maire’s writing activity raises the question of how he managed to find the time to write five books in four years, at the height of the social crisis and the rise in public debt to 3 thousand billion euros.”