France’s fiscal woes cast a long shadow over Macron’s EU ambitions

PARIS  — French President Emmanuel Macron's lofty European leadership ambitions are once again getting a reality check.

The French government is scrambling to make savings and reassure financial markets after official figures this week showed that public deficit had overshot its target and widened to 5.5 percent, a harsh fiscal reality that could upend Macron's wartime-leader-of-Europe aspirations.

With France already buried under Europe's highest tax-to-GDP ratio, along with high interest rates, there's no easy fix to Macron's latest problem. The government is considering cuts to social benefits and budgets for local governments, a politically inflammable move in France — a nation that considers its generous welfare cushion sacrosanct.

Over the past weeks, Macron has aimed to create momentum across Europe to support Ukraine and face down Russia's imperial ambitions, as U.S. support remains fraught with uncertainties over the looming presidential election and as prospects on the battlefield in Ukraine remain bleak.

But Macron's success in carrying the mantle of European leadership will depend on his ability to follow words with actions and on bringing Germany around to France's ideas for a stronger, more sovereign Europe. He needs hard cash to buy weapons for Ukraine and fiscal discipline to keep Germany's trust.

"When Macron came to power in 2017, he pledged he was going to be the great reformer, get public finances under control, and build credibility with Germany," said Mujtaba Rahman, head of Europe for Eurasia Group. "That entire image is now challenged."

France's new fiscal reality will also undermine Macron's push for more joint borrowing to fund European defense projects.

"It contributes to the fear that Macron is trying to socialize France's domestic problems when he talks about common debt, that he wants to reach into Germany pockets to sort his economic mess," Rahman said.

France itself has pledged up to €3 billion in military aid to Ukraine this year as part of the security deal France and Ukraine signed in the wake of commitments made at a NATO summit last year. But that money has yet to be clearly budgeted.

It's the economy, stupid

This week's announcement that the public deficit reached 5.5 percent in 2023, significantly more than the government's 4.9 percent target, sent shock waves through the French establishment.

On Wednesday, French Prime Minister Gabriel Attal put on a brave face and pledged that France would not miss its target of bringing France's deficit under 3 percent in 2027, in line with EU goals.

"Many said it was improbable that we would bring the deficit under 3 percent in 2018. And we did it with the president," he said on French television.

According to the economy ministry, the higher-than-expected deficit was caused by a shortfall of €21 billion in tax revenues due to lower-than-expected inflation last year. Having already announced €10 billion of cuts in February, the government is looking at trimming the budgets of government agencies and local government. But more painful cuts to welfare benefits, including unemployment benefits and state-paid ambulance trips for non-urgent patients, are already being floated.

And that's just the beginning. France audit body the Cour des Comptes has warned that the country needs to save €50 billion euros over the next three years to reach the EU deficit goal by 2027.

Eric Chaney, an economics consultant and former chief economist for AXA, said he was "skeptical" the government was going to make significant savings.

"We've been hit by a lot of shocks in recent years: the eurozone crisis, the Covid pandemic and our response was to spend as much as was needed, while interest rates were zero," he said. "That is over and the government can't engage in more spending, but the population is used to it."

Macron's government also lacks a majority in the National Assembly, where recent parliamentary debates about reforming state pensions and balancing the books have been particularly acrimonious. The French president will struggle to get more budget-cutting legislation through a lower house split between the centrists, the far left and the far right.

And there's potentially more bad news down the line. In April and May, ratings agencies are due to update their ratings on French debt, weeks ahead of an EU election, in which polls show Macron's centrist group trailing the far right.

Talk is cheap

With budgets increasingly under pressure, France's ability to put its money where its mouth is with respect to its Ukraine pledges is under greater scrutiny. Up to €3 billion promised to Ukraine for 2024 has not yet been clearly budgeted, which has raised doubts and concerns among allies, especially the Germans.

France is also a very vocal supporter of a Czech initiative to buy ammunition from non-European countries to give to Kyiv amid shortages on the battlefield. But it has not pinned a dollar figure to its support.

On Tuesday, Armed Forces Minister Sébastien Lecornu promised that aid for Ukraine would be ring-fenced despite the complicated economic context. France's multi-annual defense budget was established at a time of very high inflation last year, and a drop in inflation has generated new savings, he said. 

"This extra affluence, we could have sent it back to the economy ministry, or invested it in our armed forces ... but the decision was made to put it into aid for Ukraine," he said. "And it's going to amount to a lot of money," said Lecornu, who did not give any specific figures.

But already people asking why France is prioritizing money for Ukraine over other issues closer to home. And Franco-German relations, already frayed over Ukraine, will come under more pressure.

"The case of France is important for the Euro area. Germany trusted France, in a way that Germany never trusted Italy," Chaney, the economics consultant, said. "If Germany starts to think France is just unable to control its rising debt, if they start losing confidence in their closest ally, the markets might have doubts about France."

Dire predictions may well come to pass, but it won't be the first time Jupiter will have fallen out of orbit.

Laura Kayali and Pauline de Saint Remy contributed reporting.

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