After an election campaign dominated by the topics of dwindling purchasing power and surging energy prices, it is now time for an economic reality check in France. The first 100 days of Macron’s second term need to establish a roadmap to tackle three issues in urgent need of reforms.
1. France’s deteriorated fiscal position and mounting public debt.
As the ECB sets the stage for tighter monetary policy, we estimate that 100bp increase in the key interest rate would raise France’s debt-service cost by more than EUR30bn over 10 years (1.5% of GDP). In this context, pension reform needs to be quickly put back on the table: We estimate that increasing the retirement age by two years could reduce public pension spending by almost 2% of GDP per year, equivalent to around EUR40bn, which could be harnessed to spur sustainable growth and accelerate the green transition.
2. Record-high corporate debt alongside above-trend household savings.
We estimate that non-financial corporates’ margins need to increase by +1.5pp on average in order to absorb the remaining +8.7pp increase in the corporate debt-GDP ratio since the outbreak of Covid-19. However, margins are likely to fall by -2.3pp by mid-2023. At the same time, French households hold close to EUR250bn in excess cash compared to pre-Covid times, which should be increasingly directed towards long-term investments (decarbonization, digitalization, corporates’ productive investments) rather than the housing market.
3. Increased external imbalances amid a widening trade deficit and growing reliance on financing from the rest of the world.
France clearly underperforms its Eurozone peers when it comes to export performance and is highly exposed to supply-chain disruptions and shortages. The war in Ukraine has highlighted the urgency of achieving energy independence and speeding up the development of non-fossil energy sources, as well as re-thinking sectorial specialization. France’s energy deficit could reach EUR75bn in 2022, or 2.9% of GDP (vs. 1.9% of GDP in 2019). In this context, it needs a clear roadmap to revise its industrial policy and upsize its manufacturing capacity via increased reliance on digital technologies, automated manufacturing and machining processes and clean energy sources.
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