France Hit by Mass Protests, Fitch Credit Rating Downgrade
France has experienced a wave of protest and a credit rating downgrade after a no-confidence vote forced President Emmanuel Macron to reshuffle his government for the second time in 12 months.
The political and social instability has battered confidence in the country's credit rating and nudged business confidence lower. Fitch Ratings downgraded the European Union (EU)'s second-largest economy to an A+ from an AA- rating.
"The government’s defeat in a confidence vote illustrates the increased fragmentation and polarization of domestic politics," the global credit rating agency said in a report on September 12. "This instability weakens the political system’s capacity to deliver substantial fiscal consolidation."
Protests struck France after then-Prime Minister François Bayrou lost a September 8 no-confidence vote. The centrist prime minister initiated the vote after facing resistance from both the right and left against his proposed austerity measures.
Demonstrators protested the decision by Macron to appoint long-time political ally and former Minister of the French Armed Forces, Sébastien Lecornu, as Bayrou's replacement on September 9. The country witnessed mass nationwide strikes on Thursday against the government's proposed austerity measures.
The instability will make it difficult for the government to reduce the fiscal deficit to 3% of GDP by 2029, as targeted by the outgoing government, according to Fitch. It's also unlikely that the new French government will be able to implement a budget plan sufficient to achieve the necessary cuts, the ratings agency said.
Half-A-Million People Protest Austerity Measures
About half a million people, including 55,000 in Paris, demonstrated on Thursday against potential austerity measures that could hurt public sector workers. One in six primary and secondary teachers walked out of classrooms across the country.
Outside the northern city of Lille, 300 school children blocked entry to their secondary school with signs that called other students to "block your school against austerity." Nine out of ten pharmacies closed, and only three of Paris's 16 metro lines functioned as usual, Le Monde reported
"More than ever, the time for action is now," the French General Confederation of Labor (CGT) said in a statement. "The anger is there, it's legitimate, and it's growing."
The government deployed about 80,000 police officers and gendarmes ahead of Thursday’s protests, according to outgoing Interior Minister Bruno Retailleau. The police arrested 309 individuals, and 26 law enforcement officers were wounded.
Police confronted a "hybrid day" of illegal sabotage by far-left groups in addition to the national protests, Retailleau said.
Macron Embattled on Multiple Fronts
Macron's appointment of Lecornu has done little to pacify his critics in the National Assembly. Leader of the right-wing National Rally (RN) party, Marine Le Pen, characterized Lecornu's appointment as a political last stand for Macron.
“The president is firing the last shot of Macronism, bunkered down with his small circle of loyalists,” she wrote on X following Lecornu's appointment. Le Pen reiterated her call for "inevitable future parliamentary elections.”
Far-left France Unbowed (LFI) party leader Jean-Luc Mélenchon blamed Macron for the turmoil. LFI said it plans to file a motion of no-confidence against Lecornu.
"The president is the source of chaos, and everything that has happened recently is the result of his actions," Mélenchon said during a speech in Marseilles on Thursday.
Lecornu Must Address Difficult Fiscal Realities
The 39-year-old prime minister must introduce a new budget proposal to the National Assembly on October 7. Lecornu has vowed to scrap the proposed cuts to public holidays and remove taxpayer-funded life-long privileges for prime ministers as part of his effort to win support.
He has to address some difficult facts about the country's fiscal situation.
French retirees over the age of 65 now make more money relative to the average salary of working-age adults in the country, a Financial Times analysis of a recent Luxembourg Income Study showed. The average pensioner earned about €1,626 gross per month ($1,926) at the end of 2022, and currently earns around 2% more than working adults.
Most other nations have the opposite income structure. US pensioners earn about a sixth less in relative income compared to employed adults, Yahoo Finance reported. UK retirees bring in about a fifth less.
French Political Parties Resist Austerity
Yet, French political parties have resisted efforts to rein in the budget.
The National Assembly has opposed previous austerity measures to rein in France's national expenditure of around 116% of total GDP. Leftist parties, such as LFI, have publicly opposed all efforts to reduce government spending.
Le Pen's RN party opposed Bayrou's proposal to cut €44 billion over the next three years and remove two public holidays. Now, they are taking a wait-and-see approach.
“We will judge – without illusion – the new Prime Minister on his merits, on his actions, on his policies for providing France with a budget," Jordan Bardella, president of the RN, wrote on X.
Proposed Wealth Tax Debate Erupts
Gabriel Zucman, a professor at France's École Normale Supérieure and the University of California, Berkeley, has proposed a 2% wealth tax. The "Zucman tax" would target those with net assets above €100 million, aiming to address inequality and tax evasion.
France's wealthiest man and head of the group LVMH, Bernard Arnault, has criticized the proposal. He told Britain’s Sunday Times that Zucman had "a clearly stated desire to destroy the French economy.”
He accused Zucman of being “first and foremost a far-left activist” who uses “pseudo-academic competence” to promote an ideology aimed at dismantling the liberal economic system.
Zucman rejected the accusations. “I’ve never been an activist for any movement or party,” he said on X. He added that his based his work on research, not ideology.
French, Italian Borrowing Costs Hit Equal Rates
With the ongoing political uncertainty and the Fitch downgrade, market confidence has soured on French debt. France's 10-year bond yield of 3.555% is now more than that of Greece's at 3.427%.
Meanwhile, the French and Italian 10-year government borrowing costs briefly hit equal rates on Thursday at about3.48%.
The French economy has historically been more stable than its Italian neighbor, which Senior Fellow at the Brookings Institution, Robin Brooks, has described as a "fiscal train wreck running at full speed."
Despite "past periods of fiscal tightening, Paris has a weak record of fiscal consolidation and compliance with EU fiscal rules," Fitch said. "We assume upcoming budget negotiations will produce a more diluted fiscal consolidation package than that proposed by the outgoing administration."
Source: France Hit by Mass Protests, Fitch Credit Rating Downgrade - Benzinga
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