Barnier Is France’s New Hope to Square Circle of Debt Discipline
(Bloomberg) -- Michel Barnier is taking the reins of the French economy with a near impossible task: Reconcile the need for fiscal discipline with overwhelming political pressure to do the opposite.
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The new prime minister’s appointment by President Emmanuel Macron has ended two months of stalemate but left unresolved the lingering question over how to stem a growing mountain of debt amid incessant demands for public spending.
Barnier’s ability to confront that challenge without a majority in parliament will be critical to whether the European Union’s second-biggest economy can keep speculators at bay. Market turmoil after Macron’s decision to call snap elections in June is evidence enough of the dangers France faces if the premier’s mission fails.
“In the time I’m here, which I hope is until the end of the presidential term if parliament wishes, I don’t want to increase our country’s debt,” Barnier said on TF1 TV on Friday. “I will state the truth, even if it’s difficult and very grave.”
Barnier and Macron have a broadly shared vision of economic policy to address France’s weaknesses, grounded in pro-business tax policies and trimming expansive social spending.
When running in a conservative presidential primary in 2021, the former EU chief Brexit negotiator called for strict commitments to spending cuts and a retirement age of 65 — one year later than in Macron’s contested 2023 pension reform.
But the president’s approach has long been unpopular and slammed for favoring business over workers.
The new premier promised a change in governing style that will require listening more to opposition parties and unions. But he indicated debt constraints allow only for limited tweaks to core policies.
“We won’t call everything into question,” Barnier said of the pension reform. “I’ll open the debate on improving this law for the most vulnerable people.”
The prime minister’s success in winning over voters and lawmakers where Macron has struggled will be key to the president’s ability to restore the economic credibility built over seven years in office.
That stint saw a sharp rise in employment, resilient growth, and an improvement in public finances until they succumbed to the strains of the Covid pandemic and energy crisis.
Even before recent political upheaval prompted investors to dump French assets, driving up borrowing costs relative to other European countries, the outgoing government’s plans to close the deficit had drifted off course. The Finance Ministry now reckons the situation worsened over the summer.
The Treasury warned in documents sent to lawmakers on Monday that the budget gap could rise to 5.6% this year and 6.2% in 2025 if no policies are changed.
According to ING economist Charlotte de Montpellier, that would require an unprecedented €110 billion ($122 billion) of savings to meet the target of a deficit within 3% of economic output in 2027.
“Barnier’s mission is very difficult, and his appointment remains fragile,” de Montpellier said. “Budgetary leeway is non-existent.”
Not only does Barnier have no majority, but he faces a National Assembly with many lawmakers outright hostile to him, or at best demanding policy concessions in exchange for not toppling the government in a no-confidence vote.
The prime minister has little time to act. French law states that the government must submit a budget by the first Tuesday in October — in this case, Oct. 1 — and EU rules demand a longer-term fiscal strategy be sent to Brussels in September.
Before that, he must also find a new finance minister to replace Bruno Le Maire, an erstwhile ally who has said he won’t remain in the post.
Barnier said his government wouldn’t just be made of conservative ministers. He could also call on politicians from Macron’s centrist group and the left, he told TF1 in his first television interview in the new role.
Voters are not convinced Barnier can get the job done. According to a poll by Elabe of 1,007 adults carried out online on Sept. 5-6, only 52% of French people think he will manage to form a government capable of adopting the 2025 budget.
After the Oct. 1 deadline, France faces scheduled assessments from Fitch Ratings on Oct. 11 and Moody’s Ratings Oct. 25. Both kept their views unchanged earlier this year, but warned of negative action depending on criteria including deficits, debt-financing costs and commitments to fix public finances.
Parliament has until the end of the year to adopt the budget. Because of a convention that opposition lawmakers refuse to back financial bills whatever the circumstances, Barnier will likely have to use a constitutional clause to adopt it without National Assembly approval — raising the danger of a no-confidence vote.
To avoid such a motion succeeding, Barnier will have to offer olive branches across the political spectrum. With the left indicating it will censure the government come-what-may, the prime minister would need to persuade Marine Le Pen’s far-right National Rally to abstain.
Such compromise could cross red lines of Macron’s economic policy and go further than the minor modifications Barnier has so far outlined. The far-right campaigned on pledges for broad tax cuts for households and the abolition of the president’s law raising the retirement age.
“This reform was a bad reform,” Louis Aliot, National Rally’s vice president, said on RTL radio on Friday. “It will be appropriate to come back to a vote on it.”
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