An economic test for France’s democracy

Bonjour. The snap election in France is going to shake up the country, and Europe, in any number of ways. The far right, nationalist and xenophobic, could be on the cusp of power. A leftwing alliance, dominated by the anti-western hard left sometimes accused of antisemitism, could also do well. Both are strongly EU-sceptic.

If we step down from the threat to liberal western civilisation to simply what the outcome will be for the economy, all the options seem pretty bad. Here is how my colleagues Ben Hall and Ian Johnston summarise it in the excellent round-up of the far right’s and the hard left’s economic offers:

The possibility of the far-right Rassemblement National (RN) in government, victory for the leftwing New Popular Front (NFP) alliance or the most likely scenario of a hung parliament full of fiscal populists has rattled investors, business leaders and France’s EU partners.

How did we get to this place? Clearly, large segments of the French population find that their grievances are not met by the mainstream parties and politicians that have so long passed power between them.

The challenge, of course, is that populists of either right or left are ill-equipped to address those grievances any better. In terms of economic policy, both ends of the spectrum are offering large giveaways to their voters. But economic populism comes up against some particularly tough economic facts in France. Paradoxically, I think this may mean we are not so likely to head into an economic or financial crisis. On the other hand, the absence of easy choices means economic policy will be extremely political from the start — but that is not necessarily a bad thing.

Baptism of fire for any victorious populists

Two charts capture the unusually severe constraints on the room for manoeuvre in economic policy for the next French government. The first shows the striking divergence between the Eurozone’s two biggest countries. In 2004, Paris and Berlin both owed bondholders about 65 per cent of their countries’ respective GDPs. Today Germany’s public debt burden has returned to that level; France’s is more than 110 per cent.

That puts Paris in third place for the public debt burden of EU countries (some way behind Greece and Italy).

The second chart shows that France is the country with the largest state imprint on the economy in the whole EU (measured by general government spending as a share of GDP).

In the absence of these factors, the large-ish public sector deficit should not be cause for worry, even if it is the second-largest in the Eurozone. Public debt at moderate or even high but stable levels need also be no problem. And more spending need not worsen the deficit if taxes are raised.

But put France’s two special circumstances together, and it is clear that it has little scope to increase public spending compared with most EU countries. The already-high debt level means it would be hard to borrow much without putting public finances at risk. The government’s already-large share of the economy means it would also be hard to fund spending increases with higher taxes, because it’s hard to find further tax rises that do not harm productivity.

Harder does not mean impossible. Both spending priorities and the structure of taxation could undoubtedly be rationalised to create better incentives for productivity — which, in turn, should create greater fiscal leeway. But that would create losers among politically powerful special interests that have long enjoyed special privileges at the hand of France’s taxpayers.

That is not what either the far right or the hard left have proposed. Their promises are of the standard populist variety: cutting taxes (for the RN), increasing public salaries and boosting public services (for the left), and both want to reverse the rise in the retirement age pushed through by President Emmanuel Macron.

The fiscal incontinence of both movements is what worries investors and economic observers both inside France and outside of it.

And the fact that France has less margin than most other countries on the two dimensions I mentioned — to let the debt rise or to increase taxes further — makes me take seriously the fiscal sustainability Cassandras in this case, even though I otherwise often think they protest too much.

This unique combination of economic realities will very quickly force some big choices on the next government. Nobody should expect a honeymoon. Three forces of discipline are likely to whip an incoming government hard — in fact, two of them are already at it.

Market discipline is working: investors in French government debt are clearly showing they demand an additional risk premium for lending Paris money.

The possibility of serious market turmoil hinted at in recent bond market movements may be one reason why RN has made ambiguous noises and delayed publishing an election manifesto. A debt crisis is a marginal possibility I think, but, in any case, the cost of dearer borrowing has to be paid.

Second is the institutional discipline from the EU. Yesterday, the European Commission took the first steps towards putting France and six other countries into the excessive deficit procedure, the bloc’s fiscal naughty corner. Brussels will follow up with a recommended multiyear trajectory for public spending, which it is then up to the French government to propose modifications to. The onus will be on Paris this autumn to come up with something realistic enough to defend both to the commission and other EU governments.

It will be a good test of whether those who campaigned in a populist style are willing to believe in budgetary arithmetic once they hold power. Things tend to look quite different in position and opposition, after all. (It will be a good test, too, of the new EU fiscal rules, which I have argued are most innovative in the way they have opened a space for cross-border politics in the shaping of public spending paths.)

That leads to the third form of discipline: the lure of power itself. In some European countries, the Nordics in particular, the populist right has moderated itself both in order to be admitted into coalition with centre-right parties and to give a good impression when in office. Something similar can be said for Italian Prime Minister Giorgia Meloni and her Brothers of Italy party. Actually being responsible for calling the shots and accountable to voters who on the whole punish incompetence, fecklessness and self-dealing, can domesticate protest politicians fast. And on the economy, at least, the RN is trying hard to give an impression of conventional responsibility: its economic spokesperson vowed last night to bring forth a deficit reduction programme in the autumn and that France would respect its EU obligations.

There are examples to the contrary, of course. Austria may be one; let alone the US. And it would be no solace that racist or hateful policies were carried out in an economically responsible way. But to the extent that electoral democracy absorbs and moderates its extremist fringes rather than be dismantled by them, that is something worth noticing and celebrating. The big question in two weeks’ time is how capable France’s democracy is to achieve this.

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