France Was Already Struggling with Government Spending. The Uncertainty with Macron's Snap Elections Did Not Help.

With French President Emmanuel Macron losing his grip on political power, he decided to disband the French Parliament and call for a snap election. Not only did his political party Renaissance lose a significant amount of seats earlier this month, but a loosely established coalition of the Left, the Nouveau Front Populaire, gained enough seats to hold a plurality. The Right-leaning party, the Rassemblement National, underperformed. Needless to say, this has thrown French politics into a frenzy. If you think that is unrelated to how the French economy fares, you would be wrong. Last week, the International Monetary Fund (IMF) released its Article IV Consultation for France in which the IMF analyzes the state of the French economy. Guess what the report revealed? This little gem:

"Heightened political fragmentation and rising policy uncertainty domestically could delay fiscal consolidation and reform efforts, weighing on confidence and raising fiscal risks. Social tensions could also materialize...Over the medium term, deepening geoeconomics fragmentation could expose France to trade and supply disruptions, increased protectionism, and rising input costs, lowering potential growth (IMF, p. 10)." 

This is not to say that everything was going swimmingly in the French economy and Macron's decision for a snap election made the economy topsy-turvy. Yes, the credit rating agency Moody's brought up similar concerns as the IMF, mainly that fiscal consolidation is unlikely to happen because of the new Left coalition in power. Its government spending was already on an unsustainable track, a point I made in 2014 which I chided France for its debt-to-GDP ratio and in 2018 when I illustrated how France's welfare spending is out of control.

It is not only a point I have made while blogging. It was a point made when credit rating agency Standard and Poor's downgraded France's credit rating from AA to AA- in May 2024 because France's deficits increased higher than anticipated, thereby driving the debt-to-GDP ratio. Standard and Poor's is also anticipating that interest payments will increase from 3.3 percent in 2023 to 5 percent in 2027, which is a major issue both for government solvency and quality of life for everyday citizens.

France's economy was struggling due to the COVID-19 pandemic, the energy crisis as a result of the war in Ukraine, and an underperforming economy in 2023 (IMF, p. 12). There are also increased spending pressures on pensions and retirement, which I commented on while  In 2023, commending Macron in 2023 for raising the retirement age for Social Security because French spend in Social Security is off the charts, even by European standards. 

While there seems to be some stabilization and recovery of the economy, it is not enough to bring down France's debt-to-GDP ratio. Whether France's economy stabilizes or ends up being successful remains to be seen. What is foreseeable is that much like with the United States, the extent to which France can get its government spending under control will play a major role on what that economic future looks like.