Macron blows hole in budget with ‘yellow vest’ measures

Macron blows hole in budget with 'yellow vest' measures

Paris (AFP) – French President Emmanuel Macron’s measures to help low-income families and so end the “yellow vest” protests will blow a hole in the budget and perhaps his reputation too, analysts say.

The 40-year-old leader came to power in May 2017 promising a new business-friendly France with healthy public accounts, ending  the chronic deficits which have been the norm since the 1970s.

But economists estimate the cost of the sweeteners he announced in an address to the nation on Monday  could reach 11 billion euros ($12.5 billion) — a blowout for a country already struggling to meet EU budget rules.

The minimum wage will be hiked next year, labour taxes on overtime will be scrapped and a tax rise on pensioners introduced this year will be rolled back.

“Emmanuel Macron’s positive image in Brussels as a good steward of the budget is going to take a serious hit,” French financial daily Les Echos commented Tuesday.

The total bill for all the measures announced since last week to help mostly low-income “yellow vest” protesters from small-town or rural France is estimated at 15 billion euros — and counting.

Under EU rules that underpin the euro common currency, France is obliged to keep its budget deficit under 3.0 percent of gross domestic product — something it failed to do repeatedly until 2017.

Last year marked the first time in more than a decade that the country was under the limit — with a deficit of 2.6 percent — thanks to cost-cutting measures and higher-than expected economic growth.

Next year, the government had forecast a slide back to 2.8 percent — even before the start of the protests, which are expected to have hit already slowing economic growth.

“In the first phase, there will be an increase in the budget deficit. We need to be clear. It’s obvious, it’s a question of priority,” Environment Minister Francois de Rugy told Radio Classique on Tuesday.

“We aren’t saying that long term the debt isn’t a problem. But the first priority is not to discuss this with Brussels, but with the French people,” he added.

Economists said Monday night’s measures would likely push the budget deficit out to between 3.0 and 3.5 percent of GDP.

It could also tip France’s total accumulated debt above 100 percent of GDP for the first time, well beyond the EU’s 60-percent ceiling.

– A gift for Italy? –

Macron has previously said he wants to reform and strengthen the eurozone single currency area, urging member states to stick to the rules.

Italy has found itself in particular difficulty with as its populist coalition government comprising the far-right League and the anti-establishment Five Star Movement (M5S) struggles to get its big-spending budget through in Brussels.

The European Commission in Brussels, which is responsible for policing EU budgets, has rejected the spending plans on the grounds that they will increase Italy’s debt mountain and not deliver the growth promised.

France’s failure to respect the rules could easily open up a new front in the dispute, with Italy claiming it is not alone in breaching the rules as it tries to get its economy going again.

“Christmas may well have come early for Italian deputy PMs Matteo Salvini and Luigi di Maio as they look to force the EU to back down,” CMC Markets commented in London.

Macron’s decision to loosen the purse strings will also affect how he is viewed by other leaders in the EU, especially in Germany, the Netherlands and Nordic countries which have long pushed for France to rein in public spending.

Macron sees sound financial stewardship as key to earning credibility in Europe, especially with German Chancellor Angela Merkel.

“He has turned from darling to fallen angel very quickly,” Kallum Pickering, an economist at the Berenberg private bank, commented on the turnaround in Macron’s image since his election in May 2017.

But Pickering offered support for the centrist, saying that the hand-outs did not mean that the president was reversing course on his larger agenda of making France a better place to do business. 

Macron has also vowed not to re-instate a top-up tax on high-earners, which he abolished in 2017 to attract investors, and will continue to cut business taxes and invest in workplace education.

“As long as he continues with pro-growth supply-side reforms, the French economy can strengthen over time despite a cyclical slowdown now,” Pickering said in a note.

“Of course, we now have to watch how much he may lose his ability to legislate additional pro-growth reforms beyond the ones he has already delivered,” he added.

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