France's soaring debt could lead to calls to leave the EU, a top bank warns

French President Emmanuel Macron’s call earlier this month for snap parliamentary elections thrust the EU’s second-largest economy into a state of political precarity. Depending on the outcome of that election, the uncertainty could even extend to France’s very membership in the European Union, according to a research note from financial services giant Macquarie. 

Macron, a member of the moderate Renaissance party, faces challenges from both the far right in Marine Le Pen’s National Rally party, and the far left with a coalition of leftist parties calling themselves the Popular Front. The economic agendas of both groups have been accused of being fiscally irresponsible, and could risk violating EU guidelines governing member states’ spending.  

“In effect, the programs of the far-Left and populist right diverge sharply from market principles and fiscal responsibility, would be radical departures from current economic policy, and would undermine France’s relations with the EU, if implemented,” Macquarie’s global strategists wrote in a Monday research note. 

The EU looks the other way on France’s soaring debt

The runaway spending associated with the policies could lead to France’s placement on what the EU calls an excessive deficit plan. EU member states get put on these plans when the European Commission, the EU’s executive branch, finds a country has violated the Stability and Growth Pact. The pact requires the 27 EU members to have a budget deficit no greater than 3% of GDP and public debt-to-GDP ratio of 60% or lower. 

The rules, though, have not been enforced very strictly. Many members of the EU are in violation of some portion of the pact. So much so, that in February it was reformed to accommodate countries such as France that have high levels of public debt. 

In any case, the plans proposed by the left and right would significantly increase public spending without a clear path toward raising government revenues. Doing so could leave France floundering and unable to fill a growing hole in its national budget. France’s debt levels sat at 109% of GDP in 2023, according to S&P Global, which projected that figure would rise steadily to 112% by 2027. While its budget deficit last year was 5.5%, which is several cuts above the (unenforced) EU threshold, it is still lower than the U.S.’s which is projected to be 6.7% this year.

A far-left that ‘refuses Europe’ 

The left has openly said it does not want to adhere to the EU’s Stability and Growth Pact. 

The French finance minister Bruno Laire, who like Macron is a moderate, was unequivocal in his condemnation of the left’s refusal to toe the EU line, saying it would lead to “economic collapse.” Doing so would almost certainly beget an “exit from the European Union,” for France, La Maire said. “The union of the left refuses the pact, therefore European discipline, and therefore, refuses Europe,” he said.

In this electoral cycle the Popular Front were unequivocal in their repudiation of Macron, claiming a “total break” from the sitting president. The left has been critical of Macron during his tenure, in particular over his controversial pension reforms, which raised the retirement age from 62 to 64. Their economic plans include reducing the retirement age to as low as 60, instituting price freezes on basic goods like fuel, food, and energy, and raising the minimum wage, according to Macquarie’s analysis. The plans would be paid for by additional taxes on capital gains and the wealthy, according to an economic policy plan the Popular Front released on Friday. 

La Maire balked at virtually all the spending increases in the Popular Front’s plan and their avowed refusal to adhere to the EU’s government spending guidelines, which he called “total delirium.” 

“It dismays me to see that left-wing political parties can still propose a program that is also out of step with the reality of the world,” he added. 

La Maire accused the far-left of not thinking through the entirety of the consequences their policies would lead to. The high levels of public debt brought on by the left’s proposed spending would risk isolating France from the EU, possibly forcing it to impose austerity measures. If that happened, the economy would slow and businesses would lay off workers. 

“Their program is complete madness,” Le Maire said. “It will guarantee downgrade, mass unemployment and an exit from the European Union.”

A far-right that’s ‘woven with lies’ and hardly better

Meanwhile far-right politicians in France, like those in other European countries, have floated euro-skeptical positions. Those calls from France’s right would only grow stronger if the EU placed it on an excessive deficit protocol, according to Macquarie. 

During the elections, Le Pen’s policies were accused of being intentionally anti-European so as to make membership in the EU appear unappealing to voters. “She wants to remain aboard the EU bus — but drive it off a cliff,” Mujtaba Rahman, Europe managing director at geopolitical consulting firm the Eurasia Group, wrote in an op-ed for Politico.  

Both of those realities drew strong condemnation from France’s minister of the economy Bruno La Maire. “There is a far-right bloc with its lies, especially in economic and financial matters, there is a far-left bloc with its follies and economic delirium,” La Maire said last week. 

The rightwing National Rally hasn’t officially released its economic agenda for the upcoming election cycle. However, the broad strokes of its policy proposals are well known. Under Le Pen, the National Rally has favored some populist economic policies like higher taxes on the wealthy and a proposal to lower the retirement age back to 62.

“When I look at the extreme right, I see a program that is woven with lies, so it’s not better,” La Maire said in a French television interview. 

Like the leftists, the National Rally also wants to make essential goods like food, gasoline, and electricity more affordable. However, the right-wingers proposed doing away with the value added consumption tax on those categories, rather than capping their prices. La Maire said doing so would lower government income by 24 billion euros, “exactly the equivalent” amount he had planned to save in order to balance the budget. The moderate La Maire, though, was unsparing in his excoriations of Le Pen and the National Rally, which like with the leftists he accused of promulgating policies that would cripple the French economy.  “They don’t care about public money,” he said. 

If the far right were to win the parliamentary elections and succeed in implementing those plans, which would consist of a major fiscal expansion, France’s debt load would soar even higher than currently projected, according to a Goldman Sachs analysis. With a National Rally victory in the upcoming elections France’s debt-to-GDP ratio would rise to 120% by 2027, eight percentage points higher than forecasted otherwise. 

Despite some of the similar effects on France’s economy, there are several notable differences between the two hardline factions’ policies. Unlike the Popular Front, many of the National Rally’s trade policies are far more protectionist, meant to shield French workers from competition from international firms. Le Pen has also found herself fielding newfound attention from France’s business class—predictably allergic to far-left politics—who turned to her after seeing the left’s tax policies. 

For the Macron-ite centrists like La Maire, even that does little to assuage what they see as two groups of extremists, who despite doing so through different means, would plunge France into an economic crisis. 

“I simply say to our voters, to the center-right voters, to the center-left voters, there is still a possibility of resistance, there is still a possibility to continue to carry an ambition for France,” he urged in his appeal to moderates.