Since we are in Euro UEFA season, the metaphor is hard to resist. Especially as France reportedly made it to the round of 8 without scoring a single proper goal in this entire championship, but was helped by own goals and penalties. Since the country is also in the midst of snap elections called by President Macron, it is only fair to ask if the far-right National Rally will romp home to victory, helped by Macron’s political gamble.
2024 is likely to witness some big elections with profound changes and consequences for everyone. The crucial ones are in the West – US, UK, EU and now, France -for these are likely to usher in big changes according to what the polls and media reports indicate. I have recently written about the UK and EU parliament elections and their likely impact on their economies; the swing to the far-right in the EU elections wasn’t as huge as predicted and you could say that the centre was able to hold and prevail in the end. In fact, Ursula Von der Leyen has been re-elected Head of the European Commission for a second term. Three cheers for continuity, though as I wrote earlier, we shouldn’t be sanguine about the rise of the far-right everywhere.
In UK and France, it is anything but continuity. In fact, people have clearly voted for change. And guess what? The two countries will be moving in opposite directions: UK under Labour is a shift to the left, after 14 years or so of the Conservatives in power. And France, with the huge success of Marine le Pen’s National Rally party is clearly signalling a swerve to the extreme right. We shall discuss what this will do to relations between the two countries a little later, but right now, let us see what effect this is likely to have on policies and the economies of both countries.
Actually, if you look at it, the two countries face a similar set of economic policy choices from the macro-economic point of view and there isn’t much room for manoeuvre. After the Covid-19 pandemic particularly, governments in both UK and France had to step in and offer huge fiscal and monetary stimulus – albeit less than the US – and protect jobs. Then, thanks to the Ukraine war which began over two years ago, they have had to subsidise households against energy price rises and the cost-of-living crisis. This has meant a large fiscal deficit as well as rising debt, though in the case of France it is also due to the highest levels of government expenditure and social spending in the EU.
According to the IMF, government expenditure in France is 56.93% of GDP, down from the highs of 61.35% in 2020, but not very different from their long-term figure of 55%-57% of GDP. And when you consider that 34% of government expenditure is on social spending, you realise what the country is up against in fiscal terms. There is a huge need for fiscal reforms in France and this is what Macron’s government was trying to push for, through the much-needed pension reforms.
In the UK, government expenditure is 44% of GDP according to the IMF which is much higher than it’s been in the past. Though the country had reduced government expenditure from a high of 51% of GDP around 1980 to below 40% by the late 1990s, it has remained at this high level. The important question is also what the government is spending most on and this is where France stands out as the odd man out among Eurozone, EU and OECD countries. Besides, when you consider that these are ageing societies, with large unfunded pensions, the amount of spending isn’t likely to go down very much in the near future. As you can see from the Office for National Statistics UK release, public expenditure has only been rising since 2000 and social protection expenditure is the one rising higher and faster than others.
And, we haven’t even discussed the gross government debt levels yet. In France it has reached 111.6% of GDP and in the UK, it is 104% of GDP, way too high for both economies. Therefore, there isn’t really that much choice that political parties have by way of policy reforms that they can offer to their electorate. I would say though, that I am surprised that the UK public pensions are still defined benefit, when they ought to have shifted to a defined contribution system decades ago. And in the case of France, perhaps a good way to reduce government’s expenditure burden is to discontinue the state pension system for all, and introduce pensions for the private sector separately.
To add to the chaos, we have both the far left and far right parties across western economies courting the working and the middle classes with the same kind of populist ideas and policies. Which means we can expect greater government sops and freebies and tax breaks for everyone. How they will manage the already imperiled public finances is a million-dollar question. Which is perhaps why there are already fears in France of what a far-right National Rally government could bring, with their election pledges of tax cuts on energy and gasoline, rolling back pension reforms and minimum wage increases. Together these could be a recipe for disaster and could worsen the country’s fiscal and debt position, besides fuelling inflation. From news reports, it appears that France has breached the EU’s debt and fiscal limits and any further worsening could create new tensions between the incoming government and Brussels. Of course, knowing Marine le Pen’s euroscepticism, one can’t rule out the possibility of France even pulling out of the EU as a worst-case scenario.
With a hung parliament result after the second round of voting in France, we have what is called a cohabitation government in France. It is not going to be a big help in economic matters, because these will be the responsibility of the National Rally minority government, while the President is responsible for foreign policy and defence, under the French system. Even then, it appears that the business community might prefer this outcome to a completely far-right National Rally government, prone as it will be to announcing populist policies that don’t necessarily mean good economic sense. Of course, the leaders of National Rally might learn that to govern, they need to move closer to the centre, as Italy’s Georgia Meloni’s government is also learning quite quickly.
The problems are not merely on the domestic economy front. They are also huge in terms of France’s relations with the EU and the Eurozone countries. As one of the two pillars of the European project for the past several decades – the other being Germany – it is likely to weaken given Marine le Pen’s euroscepticism and that can’t be good for the European bloc. This, when EU countries also need to show greater unity under NATO and support for Ukraine’s war against Russia. I have been writing that perhaps it’s time for Europe’s four largest economies – Germany, France, Italy and Spain – to together steer their countries and the EU through what promise to be challenging times in the future.
In the UK, the landslide win for the Labour Party is perhaps best seen as anti-incumbency after 14 years of a Tory government, that also spearheaded disastrous Brexit. It will be easier for Labour to push through their economic reforms and those must be at the top of the agenda. As I have been writing, it will have to be a combination of government borrowing and tax increases that will fund much needed investment in improving their public services and infrastructure. Since Britain is in dire need of new investment, Labour must take care that their policies are business-friendly, though I don’t mean more tax breaks. I was quite surprised to read that corporate taxes in the UK were as low as 19% in the past few years and have only recently been increased to 21%. These kinds of low tax policies – while they might help initially to attract investment from overseas – have limited benefits from an economic point of view over the long term. As we saw in the aftermath of Brexit, many companies especially in the financial services sector shifted to Paris, and thanks to one snap elections decision by President Macron, are considering returning to London again. So, investment decisions are determined by a host of factors, including political stability, security, availability of educated and skilled workforce, a conducive R&D and innovation environment and more.
UK under Labour must also unite much more. As I thought it would, Labour has done much better in Scotland in these elections and must put this political capital to good use. It must deliver on the “levelling up” promises that the Tories made under Boris Johnson, and reduce the need for Scotland wanting a second referendum, for example. It must also take economic development to corners of Britain that have been neglected for decades. After all, it is all of UK that must become more competitive, more productive and more engaged with the rest of the world.
Now, why did President Macron call a snap election? Perhaps he was so rattled by the shock results of the European Parliament elections in which Renew lost badly to the far-right National Rally that he thought a second election close on the heels of the first one might produce a different result. Or maybe he thought – correctly – that the other parties would rally together in the second round to prevent National Rally from gaining an absolute majority. Or, as I thought might be his intention, he was trying to call their bluff in a way, by getting the National Rally to govern with a series of policy blunders so that the French electorate would think twice about ever re-electing them again in future. This could be plausible if he was thinking about 2027, when his term ends. He cannot contest an election after two consecutive terms as President, but he must have plans for what his party intends to do then. If he and his party are serious about governing France for the future with a set of progressive, forward-looking reforms, he must use the next three years to do a lot of work. Strengthen the party at local and regional levels, articulate a clear reform agenda and keep communicating it, and finally building a second line of leadership that can succeed him effectively.
As it is, I can’t believe how much the political landscape in France has changed over the past few decades. The two mainstream parties of the centre-right Republicans and the centre-left Socialists are weakened when far right parties like the National Rally have surged in popularity. It suggests a highly polarized country to me, just like so many others in Europe and elsewhere. It also suggests the need for change everywhere. That’s exactly what the people in UK have voted for. There too, smaller and newer parties such as Reform UK and the Greens have entered the fray and are doing well.
About how the new UK Labour government and the new French government will get along, time will tell.
Peripatetic Perch 