French President Macron's EU ambitions hit a "rock"

The French government is scrambling to save money and calm financial markets after official figures this week showed the public deficit blew past its target and widened to 5.5%, creating a harsh fiscal reality that could upend French President Emmanuel Macron’s ambitions of a wartime European leader.

With France having the highest tax-to-GDP ratio in Europe, and high interest rates, there is essentially no easy way to fix Mr Macron's latest problem.

The French government is considering cuts to social welfare and local government budgets, a move that could cause political turmoil in France – a country that regards its generous welfare package as “sacrosanct”.

First problem

In recent weeks, Mr. Macron has aimed to build momentum across Europe to step up support for Ukraine in its fight with Russia, as the fate of Washington’s latest aid package to Kiev hangs in the balance as the U.S. presidential election looms, and as the outlook on the battlefield in Ukraine remains bleak.

The French leader wants to promote his vision of European strategic autonomy and demonstrate the EU's ability to support Kiev without relying on the United States, especially as the possibility of Donald Trump returning to the White House grows.

“The concerns about a second Trump presidency have woken up Europeans to the fact that they need to do more to protect themselves,” said Artin DerSimonian, a fellow in the Eurasia Program at the Quincy Institute for Responsible Statecraft.

“Such a perception across the continent plays a role in promoting Mr Macron's idea of strategic autonomy,” said the expert from the Washington DC-based organization.

But Mr Macron’s success in assuming the mantle of European leadership will depend on his ability to turn words into action and convince Berlin to back Paris’s ideas for a stronger, more sovereign Europe.

World - French President Macron's EU ambitions hit a — French President Emmanuel Macron and German Chancellor Olaf Scholz stand in front of the Brandenburg Gate, illuminated in the colors of the Ukrainian flag, in Berlin, May 9, 2022. Europe's strategic autonomy is a concept that encompasses not only defense issues but also security in a broader sense. Photo: Getty Images

To put it bluntly, the first problem remains that the French leader needs money to buy weapons for Ukraine and financial discipline to keep Germany's confidence intact.

“When Macron came to power in 2017, he promised to be a great reformer, to take control of public finances and to build credibility with Germany,” said Mujtaba Rahman, head of European analysis at Eurasia Group. “That whole image is now being challenged.”

France's new financial reality will act as a "rock" in Mr Macron's efforts to find more money to finance European defence projects.

In addition, France has pledged up to 3 billion euros in military aid to Ukraine this year as part of a security agreement the two sides signed as part of commitments made at last year's NATO summit. But in France, that money has yet to be budgeted.

Financial "cornerstone"

The announcement by the national statistics agency Insee that the public deficit will reach 5.5% in 2023, significantly higher than the government's forecast, has sent shockwaves through the French ruling elite.

This figure is much higher than the 4.9% assumption used by the French Finance Ministry to include in its 2024 budget plan approved by the French National Assembly late last year. France's public debt currently stands at 110.6% of GDP.

On March 27, French Prime Minister Gabriel Attal pledged that France would not miss its target of bringing its budget deficit below 3% by 2027, in line with the EU target.

“Many people said it was unlikely that we would bring the deficit below 3% in 2018. We did it with the president,” Mr. Attal said on French television.

The French government has been preparing for the bad news for weeks. In an interview with Le Monde on March 6, “due to the loss of tax revenues in 2023,” the figure will be “significantly above 4.9%.

Speaking on RTL radio on March 26, French Finance Minister Bruno Le Maire said the higher-than-expected deficit was due to a 21 billion euro drop in tax revenues by 2023. He pointed to the fact that inflation, which usually boosts tax revenues, slowed last year.

After announcing €10bn in cuts in February, Mr Le Maire also said he was looking at slashing the budgets of state agencies and local authorities. But more painful cuts to benefits, including unemployment benefits and emergency care payments for non-urgent patients, have been floated.

And that's just the start. France's audit agency, the Cour des Comptes, has warned that the country needs to save €50 billion over the next three years to meet the EU's deficit target of 3% by 2027.

Eric Chaney, an economic consultant and former chief economist at risk consultancy AXA, said it was unlikely the French government would be able to make significant savings.

“We’ve had a lot of shocks in recent years: the eurozone crisis, the Covid pandemic, and our response was to spend as much as we could, in a zero interest rate era,” Chaney said. “That era is over and the government can’t spend much more, but people have gotten used to it.”

President Macron’s administration also lacks a majority in the National Assembly, where recent debates over state pension reform and balancing the books have been particularly bitter. The Elysee leader will struggle to get further budget cuts through the lower house, where his centrist faction is sandwiched between the far left and the far right.

And there is likely to be more bad news. Rating agencies will update their ratings on French debt in April and May, just weeks before European Parliament elections, in which polls show the centrists trailing the far right.

Easier said than done

With its budget under increasing pressure, France’s ability to use its own money to meet its commitments to Ukraine is coming under increased scrutiny. Up to €3 billion promised to Ukraine by 2024 has yet to be clearly budgeted, raising doubts and concerns among allies, especially Germany.

France is also a big supporter of the Czech Republic's initiative to buy ammunition from non-European countries to supply Kiev, as Ukrainian soldiers are fighting a shortage of artillery shells on the battlefield. But there are no French euros for the Czech Plan.

French Defense Minister Sébastien Lecornu insisted on March 26 that aid to Ukraine would be allocated despite the country's difficult economic situation. Lecornu said France's multi-year defense budget was drawn up at a time of very high inflation last year, and that it had created new savings after inflation eased.

“We could have sent this huge amount of savings back to the Treasury or invested it in our armed forces… but the decision was made to use it to provide aid to Ukraine,” said Minister Lecornu.

But some have questioned why France would prioritize money for Ukraine over other, more pressing issues. And Franco-German relations, already strained by the Russia-Ukraine conflict, will come under further pressure.

“France is very important to the euro zone. Germany trusts France in a way that Germany never trusted Italy,” said Mr. Chaney, the economic consultant. “If Germany starts to think that France can’t manage its growing debt, if it starts to lose confidence in its closest ally, then the markets could also doubt France . ”

Minh Duc (According to Politico EU, Al Jazeera, Le Monde)

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