Following a period a rising French bond yields, and associated increased focus on the fiscal outlook in France’s accelerating election campaign, poll favorite Marine Le Pen today weighed in with her “fiscal plan” for France’s future. While a modest reduction in long French yields – about 10bp at the time of writing implies that Le Pen’s rhetorical engagement on the fiscal issue has been positively received, regretfully the contents of her plan are largely fictions and do not represent a credible potential governing fiscal platform. French 10y yields were at one point down about 20bp, but as investors digest the details of what Le Pen proposed, they are likely to return at least to where they were before Le Pen’s announcement.
The details of Le Pen’s proposals are available HERE, and while they superficially appear fiscally hawkish and intent on restoring France’s primary surplus and a declining debt trajectory after just a few years, a closer inspection of the details of the plan reveals its shallowness.
Most of the proposed fiscal consolidation – an about 2 percent of GDP reduction in France’s primary deficit in 2028 – sensibly comes at the start, but is in the program assumed to have no negative effect on GDP growth stable at 0,9 percent. This is simply not credible, as fiscal multipliers in consolidations are known in the economic literature to be between 0.5 – 1.5, depending on the circumstances. The program explicitly states that it assumes only a 0.5 percentage point negative effect on GDP over the first 5 years of the program. Again, simply not a credible fiscal framework given the scale of the consolidation planned.
Too few details are available for a detailed evaluation at this point of the specific spending cuts and tax measures planned, but suffice to say Le Pen proposes to except retirees and pensions from any cuts, and also plans significant reductions in French VAT proceeds and other tax cuts. In short, the proposed measures will in no way add up to the nearly €140bn in claimed annual budget consolidation by the end of her 5y term in 2032.
Bond investors are unlikely to be fooled by Le Pen’s fake fiscal hawkishness, so the question arises what the impact of this fiscal proposal will be on French bonds and perhaps more importantly on the unfolding election campaign?
The first question is quite easy, as bond yields have already bottomed out and are now again rising. Le Pen in her speech – inexplicably for a nationalist leader always opposed European interventions – also called for the ECB to intervene in euro area bond markets to free up “tens of billions of euros for governments to invest in euro area sovereignty”.
Recalling that the ECB is independent, and its Governing Council is likely to resent calls for the central bank to de facto provide euro area governments with monetary financing (Le Pen did not justify her call for ECB bond purchases by referring to the monetary transmission mechanism), Le Pen’s call on the ECB may backfire. Once investors realize that the ECB now will view any intervention in French bond markets as an explicitly partisan political act, and hence further raise the threshold for any TPI intervention to assist France, yields may rise further.
With Le Pen’s fiscal bluff likely to be called by investors, she has put herself at a disadvantage in the election campaign as her opponents will call out the superficial nature of her fiscal proposals. She therefore faces a political choice.
As discussed in last week’s note, she may just double down on her proposal for a referendum on a constitutional fiscal “golden rule” in France, without offering more concrete fiscal proposals than those presented today.
She might also, as indicated by her proposals today exempting pensions from any cuts, choose to go on the political offensive and oppose the (small) real reduction in some pensions included in the government’s 2027 budget proposal. If so, Le Pen will hope that her referendum idea and proposals today will politically shield her any fallout from the collapse of the budget.
In sum, Marine Le Pen’s entry into the French fiscal sustainability debate is unlikely to calm investors, or improve her electoral fortunes.
Jacob
