France’s new finance minister, the experienced Eric Lombard (banker, economist – newly nicknamed as ‘Spider-Man’) has relaunched the budget process that will determine the survival of the ‘Bayrou’ government, and potentially Emmanuel Macron himself.
Granted that the prime minister has been focused on other risks (environment event in Mayotte, farmer protests and a sharp deterioration in relations with Algeria), Lombard is producing the contours of a budget that simply put, favours politics over the bond market.
It is expected that the savings that the government aims for will be lower than that of the Barnier government and will aim to be driven by thrift and efficiency gains as opposed to higher taxes on the working/middle classes and pension cuts. A levy on air travel, ‘extra’ tax on large corporations and on share buybacks will be kept.
It is likely that the budget deficit target will be pushed higher (to 5.5% from 5%) which renders the exercise meaningless. This is not ideal from the point of view of bond markets – this week bond yields across developed markets have been rising – the UK Gilt yield is at multi decade highs – and France’s yield has continued to rise, not just in absolute terms but also relative to Germany. The yield spread between the two countries is now at 90 basis points, the highest in over a decade. This suggests that bond investors are specifically becoming more concerned about the long term outlook for France’s finances and that the cost of refinancing its debt, is becoming more expensive for France.
For the time being though, the Bayrou government appears more focused on politics than financial markets, and while they may produce a budget that is not voted down, the process may simply push transform the risk from a political one, to a financial one.
Lombard is having consultations on the budget with the main parties this week, starting with the Socialists, who are the main ‘target’ of the process in the sense that the government wants them to not vote with another censure, if that takes place. Apparently, feedback from the meeting with the socialists was positive.
Bruised by the budget process that Michel Barnier underwent, this government will tread carefully to find a compromise that the socialists in particular, can vote for. In the meantime, unless there is a sharp upswing in growth, Frances finances remain in poor shape, and there is no appetite in France to undergo austerity. Indeed, across the political spectrum, there ae very few politicians who advocate a reduction in spending, and no party has a reputation as being fiscally sensible.
It will be a difficult year for Macron, who whilst facing opposition on multiple fronts at home, may find that his government comes under the scrutiny of the EU for its relative fiscal prolificacy and that Macron himself is called to task for the poor management of France’s finances. 2025 could be the year when the euro-zone has a mini financial crisis, but from the core rather than the periphery.
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