What French economic policy may look like after the Olympics
The snap parliamentary election called in June by French President Emmanuel Macron produced no absolute majority for any of the country’s three dominant political blocs. There is now widespread uncertainty about who could serve as prime minister. Many looked to the broad-left New Popular Front (NFP), which has the most seats, to put forward a candidate. After almost three weeks of infighting they finally agreed on Wednesday to put forward Lucie Castets, a little-known tax fraud official and public servant.
Mere moments after the announcement, Macron declared that he would not name a prime minister until after the conclusion of the Olympic Games in August. Until then, a caretaker government under Prime Minister Gabriel Attal will remain in place. Still, the potential of an NFP prime minister spooked the markets, as the party’s economic policies would trigger even more deficit spending. The spread of France’s ten-year bond yield against Germany’s increased by five basis points, reflecting a loss in confidence in the French government’s finances.
But even after the Olympics, Castets is unlikely to be tapped to form a government. Instead, the parties of the center, center right, and center left will have to endure a tedious drill from which France’s constitution has spared them for decades: negotiations.
The moderate “Republican Right” (DR) appears ready to play ball and recently put forward a set of policy proposals complete with two red lines that will inform the negotiations. But a deal including the Republicans would not be enough: The centrists would need the more moderate forces from the NFP (read: excluding the far left) to support—or at least not oppose—a government for the time being.
The negotiations behind an arrangement that would bring Communists, Gaullist Republicans, Greens, and centrists under the same banner is likely to be every bit as complicated as one would imagine. But in the likely case that the NFP fails to clear the bar for government formation, this would become the only option. The question then becomes: What could this political hodgepodge compromise on?
Synchronized steering
Despite having lost the legislative election, the Macron-supporting center block will not concede much on any of its policy laurels. Reversing the controversial and hard-won increase of the retirement age from sixty-two to sixty-four, for example, will be off the table.
The center right has also set explicit red lines: that there be no tax increases and that fiscal reform not hurt pensioners.
Taking into account these constraints and the need to manage France’s strained fiscal situation, there is not much negotiating flexibility left. Nevertheless, the centrist coalition must consider some concessions and secure certain inducements if they hope to bring the Republicans, Socialists, and Greens onside.
- Green reindustrialization
The adoption of the Inflation Reduction Act (IRA) in the United States prompted pushback from many European states. French Finance Minister Bruno Le Maire and his German counterpart Robert Habeck claimed the legislation was not compatible with World Trade Organization principles and called for the “defense” and green reindustrialization of the European Union (EU).
In July 2023 the French National Assembly unanimously agreed on the creation of a “national strategy” for green industry, which lays out a plan for the 2023-2030 period. One week later, a Green Industry Law was approved at first reading and later adopted in October 2023. Like the IRA, France’s Green Industry Law seeks to meet environmental objectives (reducing forty-one million tons of CO2 by 2030, or 1 percent of France’s total footprint) and economic ones (positioning France as a leader in green and strategic technologies, while reindustrializing the country). As part of the law, the Green Industry Investment Tax Credit (C31V) was established to encourage companies to carry out industrial projects involving batteries, wind power, solar panels, and heat pumps. The C31V is expected to generate €23 billion in investment and directly create forty thousand jobs by 2030.
While in opposition, the Socialists and Greens voted against the law and other left parties abstained. All cited the lack of specificity and actual green commitments in the industrialization-centered bill. However, if the centrist bloc offered to revisit the bill or introduce new, more targeted standards and legislation, it could serve as a powerful inducement to win the Greens and Socialists’ support. Given that this French counter to the IRA involves private-sector mobilization and promises reindustrialization, it has the added benefit of being (just about) fiscally feasible and acceptable to the right.
- Rewarding effort
The thirty-five-hour work week was first introduced into French law by Lionel Jospin’s Socialist-led government in 2000, and it has since become a cornerstone of the left’s platform. However, the fact that most employees still work above the legal thirty-five-hour limit has led to a system where they can take half days or full days off to compensate for extra hours.
In August of 2022, Macron’s government successfully passed an amendment that allowed firms to buy these hours back from their employees, essentially transforming them into paid overtime.
As part of the center right’s current proposal, the group is seeking additional flexibility in the thirty-five-hour work week by reducing taxation on overtime, on top of cutting overall social charges paid by employees. The center right has been fairly nonspecific about how much these would be cut, most likely to avoid alienating the left. However, the main way the Republicans propose to fund this—a cap on unemployment benefits at 70 percent of the minimum wage—would be a red flag for the parties which could otherwise be lured out of the NFP.
- Balancing budgets
France’s large budget deficit, which in 2023 soared to 5.5 percent of gross domestic product (GDP), raises the stakes. In May, S&P Global Ratings downgraded the country’s long-term credit rating from “AA” to “AA-” and the European Commission reprimanded France for exceeding the EU’s deficit cap of 3 percent of GDP. Today, the Commission formally opened proceedings against France and six other violating countries, directing them to immediately take corrective measures to rectify their fiscal deficits or else face financial sanctions from Brussels.
Both S&P and the Commission forecast positive economic growth, but emphasize the urgent need for France to address its public finances. Growth alone will not be enough to overcome the fiscal hurdles ahead.
Reconciling the center right’s rejection of any tax hikes and the need to provide parties of the left with guarantees on social spending for them to abandon the NFP will be very challenging indeed. But there is some room for compromise.
Shortly after Macron’s arrival at the Élysée Palace for his first mandate in 2017, he moved to slash France’s contentious wealth tax, replacing it with a real estate tax. A flat tax of 30 percent on capital gains was also introduced. The decision came as part of Macron’s pro-business platform in a bid to curb the flight of French millionaires from the country, and it drew sharp criticism from political opponents who labeled him “president of the rich.”
The centrist bloc could offer to reintroduce a progressive taxation scheme on capital gains. In the spirit of France’s goal of green reindustrialization, the centrists could move to keep the favorable 30 percent flat tax for green technologies to encourage investment, while introducing a progressive scheme in other sectors. If they do decide to favor green industrial investment, the tax benefit would have to apply to capital gains accrued throughout the EU—not only France—so as to not violate single market rules.
Sticking the landing
Negotiations will be more of a marathon than a sprint. Macron is unable to call for new elections for at least the next twelve months, so until then, this parliament will have to find a way to work together.
After the formation of a government—which Macron has indicated will not begin until after the Olympics—the next major challenge facing French policymakers is to pass the yearly budget by December. This grueling event will be made all the more difficult by today’s unprecedentedly divided National Assembly.
Whichever government emerges from current negotiations will risk having its spending plan voted down immediately. Fortunately for France, the constitution contains a proviso that would allow the state to carry on. Essentially, if the Assembly cannot agree on a new budget, the plan approved for the previous fiscal year will roll over.
However, recycling this year’s budget would still create a projected deficit of 4.4 percent. This would again violate the EU’s 3 percent cap and fall well short of the deficit reduction the markets—the ultimate referees of how France is faring—are hoping to see.
Charles Lichfield is the deputy director and C. Boyden Gray senior fellow of the Atlantic Council’s GeoEconomics Center
Gustavo Romero is an intern with the Atlantic Council’s GeoEconomics Center.
At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.
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