Last week, the International Monetary Fund warned in no uncertain terms of a significant slowdown in global economic growth and high inflation. There could also be a period of stagflation in France, with little or no growth and high inflation. From the French point of view, the fact that the national debt increased to almost 115 percent of the gross domestic product in the first term of President Emmanuel Macron would make matters worse.
At the same time, there are increasing signs that the European Central Bank will tighten monetary policy and raise interest rates. That could make it more difficult to reduce the high mountain of debt. A variant favored by supporters of sound government finances to react to the changed global economic situation would be to reduce government spending or increase taxes.
But the day after the election, nothing was heard from Macron’s camp. On the contrary, the re-elected president seems determined to continue his “whatever the cost” policy. On Monday morning, Macron’s Economy Minister Bruno Le Maire made it clear on French radio that “the discount on fuel prices will be maintained in the coming year”. In addition, support “aimed at frequent drivers” could come into force in the summer. The cap on gas prices for end consumers will also be retained in 2022. In short: Macron does not want to change the subsidization of energy costs. At the same time, many economists take a critical view of it, especially in times of stagflation, when the state co-finances the consumption of citizens across the board.
However, Macron’s planned additional spending over the next five years is by no means exhausted. He wants to hand out a grocery check right after his re-election. However, it should only go to the eight million people with the lowest incomes. French people who work and earn less than the sum of three minimum wages also receive the tax and duty-free “Macron” bonus. It will be increased from the current 2000 to up to 6000 euros.
Macron wants to double the number of police officers, higher salaries in the civil service and for teachers
A draft law also provides for an additional 15 billion euros to be made available for security over the next five years. Macron wants to double the number of police officers on the streets by 2030 and hire 8,500 additional judges and prosecutors. Salaries in the public sector are to be increased again for the first time in five years. He wants to enable teachers to increase their salary by up to 20 percent if they take on homework help or training outside of school hours. In addition, there is a general wage increase for everyone by around ten percent and a minimum salary of 2000 euros.
In addition, there are further tax cuts amounting to 15 billion euros, after 50 billion euros in his first term. Among other things, he wants to significantly increase the tax allowance for inheritance and relieve companies of a further seven billion euros. Irrespective of this, it is planned to subsidize the ecological change in French industry with ten billion euros a year.
The only point so far that could lead to sustainable savings in the household is the pension reform. After Macron failed in his first term in office, it should succeed this time. Macron’s plan is to gradually raise the retirement age from 62 to 65 by 2031. What is new is that he wants the social partners to have a say in the pace of the transition and the goal. Because 80 percent of the French are against the reform.
Macron also wants to eliminate the many injustices between the estimated 40 different pension systems in the country and standardize the models. In view of the failure of many of his predecessors, it is questionable whether he will succeed. So far, the only thing that is certain for pensions is that further expenditure is pending. The minimum pension is to be raised from 980 euros to 1100 euros per month.
Interest rates on government bonds are already rising
So there is not much sign of budgetary discipline at the moment after the election. This is definitely relevant for Germany. According to experts, the real risk for public finances in the EU does not come from small euro member countries, but from large ones like France.
The country is already feeling how the climate on the financial markets is changing. The ten-year French government bond has traded at almost 1.4 percent interest in the past few weeks. Just a few months ago, the Ministry of Economics had forecast an interest rate of 0.75 percent for the end of 2022. Le Maire knows that if the interest on the debt to be repaid increases by just one percentage point, France will have to pay almost 30 billion euros more every year to reduce the burden. The only explanation for the newly elected president’s relaxed attitude is that parliamentary elections are due in June and he doesn’t want to scare the voters any further.
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