France is at a critical political and economic juncture following President Macron’s dissolution of the National Assembly and calling for early elections after the far right’s victory in the European Parliament elections from June 6 to June 9, 2024.
The political scene grew increasingly complex after the July 7 parliamentary elections, which saw the coalition of leftist parties win but fall short of an absolute majority and the extreme right drop to third place, marking a substantial decrease in support for the pro-Macron coalition.
This paper seeks to analyze the economic conditions that influenced the French electoral scene amid mounting economic and financial crises and the rise of farmer protests, while anticipating the prospects of the French economy during the next stage, considering various potential government formation scenarios.
Triggering Elements
The French economy is grappling with intertwined crises, including surging energy and food prices, a decline in citizens’ purchasing power, slowing economic growth, and a growing fiscal deficit, which have driven voters to shift their support towards the leftist movement. The general sentiment among the French populace is that President Macron’s government is failing to provide swift and practical solutions to these economic challenges, which can be outlined as follows:
● Inflation Surge: The onset of the Ukrainian war in 2022 collided with the world’s attempts to rebound from the Covid-19 pandemic, which triggered severe disruptions across all economic sectors. This spurred a global economic crisis, resulting in broken supply chains, a slowdown in economic activity, and skyrocketing prices of food, basic commodities, raw materials, and energy. Additionally, shipping and transportation costs soared, amplifying inflationary pressures worldwide, including in European countries and primarily France. The figure below illustrates the trend of French inflation rates since 2021.
Figure 1: Monthly inflation rate in France, 2021-2024 (%)
Source: The National Institute of Statistics and Economic Studies (INSEE)
The above figure reveals a series of successive and noticeable increases in the annual inflation rate from late 2021 until the end of 2023, peaking at 6.3% in February 2023. Following this peak, inflation declined to around 2.1% by mid-2024. Despite this slowdown, inflation remains above the Banque de France’s target rate of 2%. The Banque de France projects that the inflation rate will reach 2.5% by the end of 2024 before decreasing to 1.7% in 2025, as depicted in figure 2.
Figure 2: Banque de France’s expectations for inflation rate (%)
Source: Banque de France (macroeconomic projections)
The Banque de France’s projections are grounded in anticipated declines in energy prices throughout 2025 and 2026, alongside a gradual slowdown in service prices. By 2026, the inflation rate is expected to approach levels similar to the average from 2002 to 2009.
● Rising Debt Crisis: Since late 2021, European countries have faced a mounting debt crisis driven by the doubling of borrowing costs due to rising interest rates. Between July 2022 and February 2023, European central banks increased interest rates six times, sending borrowing costs to their highest levels since late 2008 and sparking concerns about debt sustainability across the eurozone. France, too, is caught in this wave, with its public debt-to-GDP ratio hitting approximately 110.6% in 2023 and expected to climb to 113.8% by 2025, as illustrated in figure 3.
Figure 3: Ratio of public debt and budget deficit (in % of GDP)
Source: Banque de France (macroeconomic projections)
In addition to the rise in the public debt-to-GDP ratio, the budget deficit climbed to 5.5% of GDP in 2023 due to a slowdown in tax revenues. Although the deficit is expected to decrease to 5% of GDP, it remains above the EU member states’ ceiling of 3%.
This situation led to Standard & Poor’s downgrading France’s credit rating from AA to AA-, marking the first such downgrade since 2013. This followed a similar decision by Fitch about a year earlier, with both agencies citing the high budget deficit and the worsening French debt crisis as key reasons for the downgrade.
● Energy Sector Turmoil: The European Union and Eurozone countries couldn’t escape the economic fallout of sanctions against Russia. They were among the first to feel the impact of the Ukraine war, which triggered a widespread energy crisis, pushing them to seek alternatives to Russian natural gas and reshaping global energy flows. In France, this led to rising electricity and natural gas prices, with the government announcing in January 2024 an increase of up to 9.8% in electricity costs during peak hours starting in February.
This price hike was driven by three successive disruptions in the French electricity market during 2022 and 2023: 1) a reduction in European gas supplies from Russia; 2) decreased electricity output from nuclear power plants; and 3) a significant drop in hydroelectric energy production due to record-low rainfall.
● Farmer Protests: France, alongside numerous European countries, is experiencing a new surge of farmer protests that began in early 2024, echoing the previous waves of unrest seen from 2019 to 2023. These protests are driven by demands for better wages, reduced restrictions, and lower costs. The unrest can be attributed to the following factors:
- European support for Ukraine has led to concessions on customs duties for Ukrainian exports, giving Ukrainian agricultural and food products a competitive edge over their European counterparts. Additionally, Ukraine’s non-compliance with EU food and agricultural standards has resulted in an influx of cheaper Ukrainian products into European markets, including France.
- European governments are committed to the European Green Deal, which aims to make the European economy sustainable and transform the EU into a climate-neutral zone by 2050. This may result in a reduction of agricultural land, a decrease in pesticide usage, and changes in agricultural and livestock production volumes. Worse, these shifts occur in uneven playing field already challenged by free trade agreements, support for Ukraine, and high energy and production input costs, potentially conflicting with goals for greater self-sufficiency in food and other essential goods.
- The European Union is in discussions with Mercosur countries (Brazil, Argentina, Uruguay, and Paraguay) to lower customs barriers. This could lead to increased imports of beef, poultry, and sugar from Mercosur, potentially inundating European markets with low-priced and lower-quality products.
- The French agricultural sector is burdened by high production costs, particularly for natural gas, electricity, and fertilizers. These rising costs add significant financial pressure on farmers across Europe.
- In France, farmers are struggling with government efforts to lower food commodity prices. Many producers are finding it difficult to cover the high costs of energy, fertilizers, and transportation, putting additional strain on their operations.
In response, the French government sought to pacify farmers by reversing the diesel tax increase. French Finance Minister Bruno Le Maire assured that France would strive to secure a fair revenue share for producers during annual price talks with food retailers. Additionally, he highlighted that France commits to offering €100 million in loans or guarantees via the state-owned investment bank BPI France, alongside cutting land taxes and streamlining approvals for water retention initiatives.
● Industrial Production Slump: France’s industrial production has been fluctuating since 2021, with a notable drop of 2.7% in May 2024. This plunge brought the Industrial Production Index down to 100.07 points, its lowest since October 2022, compared to 102.86 points in April 2024, as illustrated in figure 4.
Figure 4: Industrial Production Index (points)
Source: The National Institute of Statistics and Economic Studies (INSEE)
This slowdown was mirrored in the GDP growth rate, which edged up by just 0.2% in Q1 2024 compared to 0.3% in Q4 2023. Projections indicate that France’s economic activity will stay subdued through 2024, with an annual growth forecast of 0.7%, as depicted in figure 5.
Figure 5: GDP growth (%)
Source: The National Institute of Statistics and Economic Studies (INSEE)
Additionally, exports saw a modest boost in the first quarter of 2024, rising by approximately 1.2%. This uptick, driven by the recovery in agricultural products and transportation equipment exports, led to a slight increase in foreign trade’s contribution to GDP growth, reaching 0.2% in the same quarter, compared to about 1% in the previous quarter.
Foggy Outlook
The French parliamentary elections have left the country mired in political stalemate, with neither the far-right nor the left movements, nor the Macron camp, able to secure an absolute majority in Parliament. This deadlock complicates the formation of the next government and may amplify economic uncertainty. Arguably, the economic outlook is closely tied to political stability. Here, we review the potential political scenarios that could emerge and their implications for the economy.
● Scenario One–Formation a Leftist Government: In this scenario, a government led by the New Popular Front, which includes the left-wing alliance with the largest number of seats, comes to power. This would enable the left to enact its economic agenda, involving capping prices on essentials like fuel and food, revising agricultural policies with Europe, and imposing wealth taxes. Additionally, the plan involves raising the minimum wage, increasing public sector wages, and reversing President Macron’s pension reforms by lowering the retirement age from 65 to 60. Measures to enhance the purchasing power of citizens are also part of the agenda. These electoral promises, if realized, would intensify the pressure on the French budget and elevate the fiscal deficit, potentially placing France in a predicament with the European Commission, which mandates a fiscal deficit ceiling of 3% of GDP.
Moreover, increasing the minimum wage and boosting public sector salaries could drive up inflation rates, which have not yet rebounded to pre-Ukrainian war levels, as depicted in Figure 1. This is because higher minimum wages are tied to increased consumption, elevated production costs, and higher overall price levels.
On top of that, raising tax rates and imposing wealth taxes would impact the profitability of companies operating in France, leading to a decline in foreign direct investment inflows. This could jeopardize France’s standing as Europe’s leading hub for foreign investment, with the country recording 1,194 foreign projects by the end of 2023.
Anyhow, realizing this scenario might be challenging due to potential opposition from the far-right and the pro-Macron camp. President Macron appears reluctant to invite the New Popular Front to govern, particularly given its lack of an absolute majority to pass its own bills.
● Scenario Two–Formation of a Centrist Government: This scenario revolves around the creation of a government that includes the pro-Macron camp along with elements of the New Popular Front and center-right parties, a goal President Macron is actively pursuing. Establishing a stable government with an absolute majority would help maintain relative economic stability in France, providing the government with the flexibility to address economic crises while focusing on the budget deficit and curbing excessive spending. This could potentially help avoid a clash with the European Commission regarding the fiscal deficit ceiling. Moreover, the realization of this scenario could reduce the current uncertainty clouding the French economic landscape. However, its success hinges on Macron’s ability to attract new allies from the center-left and center-right parties and his skill in leveraging the divisions within the left coalition to win over the Socialist Party and the Greens.
● Scenario Three–Formation of a Technocratic Government or a Caretaker Government: In this scenario, Macron capitalizes on the ambiguous constitutional provisions regarding the deadline for government formation to keep Gabriel Attal’s government in place temporarily until June 2025. At that point, the president can constitutionally dissolve Parliament again and call for new legislative elections, which the leftist coalition opposes. Such a move could exacerbate the crisis, heighten uncertainty and ambiguity in the economic landscape, and increase investor apprehension about injecting capital into an unstable economy, ultimately affecting foreign direct investment levels in the country.
In conclusion, an inextricable link exists between the economic and political spheres when analyzing the potential ramifications of the parliamentary election results on France’s economic trajectory. The country’s unprecedented state of uncertainty and political deadlock portends adverse economic consequences. This underscores the fundamental truth that a country’s economic stabilization is contingent upon its political stability.
