Macron Gets a Dose of Reality

As President Macron gears up for ambitious economic reforms, the French fiscal watchdog has issued an unpleasant warning to France’s new golden boy. Financial Times explains:

President Emmanuel Macron’s new government will have to slash spending if it is to meet its EU budget deficit limits this year, France’s public spending watchdog has warned. […]

It said France was on course for a deficit of 3.2 per cent in 2017 — breaching the EU’s 3 per cent limit — unless the government found about €4bn in new savings this year. […]

Mr Macron was the only candidate who promised to comply with the 3 per cent deficit rule. But the starting point, which is worse than expected, could force the president to delay or curtail his spending plans and proposed tax breaks.

It could potentially undermine his flagship attempt to reform the labour market, since the quid pro quo was to be a big training programme for the unemployed and an expansion of social protection for new categories such as the self-employed.

It is going to be hard to push unpopular structural reforms AND budget cuts at the same time, but that is exactly what Macron will have to do. In both cases, his credibility with the EU is at stake. If he fails to comply with the 3% deficit rule, his campaign mantra of “respect for European commitments” will prove hollow; if he fails to overhaul the labor market, Germany will be less inclined to play ball on the other Eurozone reforms Macron is seeking. Either defeat would be a significant early blow to Macron’s reformist credentials.

Perhaps Macron’s high approval ratings and parliamentary majority will let him push both agendas through. But as the union strikes and street protests kick into high gear this summer, he will face immense pressure to change course—and there are already early signs that Macron may succumb to protectionist pressures. As WRM wrote earlier this month, Macron’s electoral victories have already demonstrated his mastery of French institutional politics. But can he withstand the pressure from the streets and force France to swallow its bitter fiscal medicine?

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