France – Macron’s Woes Mount

Although there is little imminent risk of Emmanuel Macron feeling compelled to call a snap election before the expiration of the Parliament’s five-year term in 2022, political headwinds are strengthening as France faces a second-wave of COVID19 infections threatens to stifle an economic recovery following an 18.5% (year-on-year) downturn in the second quarter, even as economic insecurity and the easing of health restrictions have created the impetus and opportunity for a revival of disruptive “yellow vest” protests.

Although Edouard Philippe was comfortably re-elected as the mayor of Le Havre at municipal elections held earlier this year, he was sacked as prime minster in a Cabinet reshuffle prompted by the otherwise weak showing the LREM and its coalition partners. Philippe has been replaced by Jean Castex, a popular former mayor of Prades, whose task is complicated by defections that left the LREM without claim to a majority in the lower house and therefore more dependent on the backing of MoDem and Agir.

The government is hoping that a bold new stimulus program worth $118 billion (or about 4% of GDP) can help to soothe social tensions and ease economic insecurity while also bolstering confidence that France will weather the crisis. In contrast to earlier fiscal measures that aimed to soften the blow of an inevitable deep contraction, the latest package is aimed at fueling a recovery (with corporate tax cuts, job training, and hiring incentives) and also includes funds for green projects encouraged by the EU through the criteria for accessing financing from its $885 billion post-pandemic recovery program.

Under a scenario in which a second wave of pandemic cuts short a near-term economic recovery, the public-sector debt burden would increase to 125% of GDP or higher by the end of next year. Political considerations make it unlikely that the government will take aggressive steps to rein in the deficit if the economy remains in the doldrums. In that vein, the recent surge in new coronavirus cases across Europe does not bode well for France’s prospects for staving off a downgrade to its sovereign credit rating.

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