With France bracing itself for the first round of its snap parliamentary election this Sunday, the near-certain prospect of victory for Marine Le Pen’s National Rally (RN) has sent French and EU elites to their panic stations. Reeling from their bruising defeat in this month’s European election, the bloc’s entire machinery is being mobilised to neutralise the “populist” threat.
First came the market’s attack dogs. As soon as Macron called the election, a massive sell-off of French government bonds began, causing the “spread” between French and German government borrowing costs to rise to the highest level since the euro crisis. This has been described as a “natural” reaction of financial markets to the prospect of a RN-led government — and the “fiscally irresponsible” economic policies many expect it to pursue.
While the party hasn’t published a manifesto for the upcoming election, in the 2022 election Le Pen’s RN campaigned on a strongly interventionist-welfarist economic platform: it included reducing to 60 the retirement age (which Macron last year raised to 64, amid massive protests) and raising minimum pensions, increasing welfare support for families, massively subsidising energy bills, boosting healthcare spending and renationalising the highways. It represented a radical break with the neoliberal orthodoxy.
Back in 2022, the Institut Montaigne think tank estimated that Le Pen’s policies would increase France’s deficit, which currently stands at around 5.5% of GDP, by around €100 billion a year — hence the widespread accusations that a RN-led government would cause France’s deficit and debt to “spiral out of control” and potentially plunge the country into a fiscal crisis. Markets, we were told, are simply acting upon legitimate concerns about the sustainability of France’s deficit.
There are, however, several problems with this narrative. Most obviously, financial markets have no reason to be concerned about a higher deficit. Such concerns would only be justified if there were a real risk of France defaulting on its debt, but this is extremely unlikely: for the simple reason that the European Central Bank (ECB) would never allow it to happen, as it would mean the end of the euro.
Even more importantly, all this talk of “the markets” ignores the fact that the spread is ultimately determined by a central bank — in the EU’s case, the ECB — which always has the power to bring down interest rates by intervening in sovereign bond markets. We saw this clearly during the pandemic: despite France’s budget deficit ballooning to nearly 9% of GDP, bond yields on French government bonds actually fell below zero — as the ECB bought up all the new debt issuance. Indeed, even during the decade prior to the pandemic, France registered a relatively high deficit on average — well above the EU’s deficit-to-GDP limit of 3% — but very low bond yields, thanks to the ECB’s post-euro crisis quantitative easing (QE) programme.
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