France, Fitch: early elections increase fiscal and reform uncertainty

France Fitch early elections increase fiscal and reform uncertainty

(Finance) – The decision of French President Emmanuel Macron to call early parliamentary elections increases theuncertainty on the fiscal consolidation path of the country and on the prospects of further economic reforms. Fitch Ratings states this in a new report on the topic, underlining that in any case there are no immediate implications for France’s “AA-“/Stable rating.

If no party wins an overall majority, it is unclear what a potential coalition government would look like and how stable it would be. The elections could lead to a so-called “cohabitation”, in which the president and prime minister come from opposing parties. This would complicate policy making as it would entail a significant shift of responsibility for economic and fiscal policy from the Presidency to the largest political party or group in the National Assembly. The president has no veto power but would maintain a leadership role in other areas, such as foreign policy and defense.

It is unclear whether the excellent performance of RN in the European elections it will translate into a national legislative majority, given the different voting system. However, recent polls indicate that RN could emerge as the largest party, which could allow it to take over for the first time a leading role in government. RN did not present a detailed tax program, but supported tax cuts and a more progressive tax system. He also called for protectionist measures to protect French companies from global competition.

The outgoing government’s 2024 Stability Program stated the goal of bringing the budget deficit below 3% of GDP by 2027, but did not fully specify measures to achieve this goal. Additionally, Fitch expects France to be subjected to the EU excessive deficit procedure. In any case, the next administration will have the responsibility to formulate corrective measures, as well as a medium-term adjustment plan in response to the European Commission’s debt sustainability assessment under the reactivated EU fiscal rules.

Fitch highlights that France’s rating is supported by a large and diversified economy, strong institutions and a history of macro-financial stability. The rating incorporates a qualitative adjustment of one notch to reflect a very high public debt/GDP ratio and the already difficult political context for consolidation.

When it affirmed its rating with a Stable outlook on April 26, Fitch expected public debt to rise to 112.8% of GDP by 2027 from 110.6% in 2023, about 15 percentage points above the pre-pandemic level. The 2023 result was the second highest public debt ratio among “AA” countries and was more than double the “AA” median of 50%. A large and persistent increase in the general government debt-to-GDP ratio resulting from higher-than-expected government deficits and an increase in fiscal rigidities could lead to anegative rating action.

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