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France Politics December 2018

France: Macron offers up pricey ‘yellow vest’ concessions

In mid-December, President Emmanuel Macron responded to the growing social unrest of the ‘yellow vest’ protests by promising a handful of fiscal measures intended to mollify the protestors. These included tax cuts, a hike in the minimum wage and the rolling back of proposals to raise pension contributions, and appeared to succeed in easing tensions after protestors took to the streets in objection to a proposed fuel-tax hike—which was also scrapped in recent weeks.

Although he stopped short of backtracking entirely on his economic-reform agenda, which some analysts paint as an important victory, others have speculated that Macron’s moves to pacify his opponents will cost the government dearly. All told, some analysts expect his announced plans to push next year’s fiscal deficit beyond 3.5% of output—well beyond the EU-mandated 3.0%-threshold that will no doubt rankle many European lawmakers. Irrespective, Macron will be eager to put recent events behind him; available data for November and December reflects an economy paralyzed by protests, and fourth-quarter growth is likely to take a bruising as a result.

Analysts at Berenberg calculate a steep price for Macron’s reforms:

“Macron’s sweeteners are coming at a cost. They add up to EUR 10 billion or slightly more, equivalent to 0.4% of GDP. On top of the already announced EUR 4 billion to cancel the fuel-tax hike, this could push the 2019 fiscal deficit from 2.8% to 3.4% of GDP unless offset by savings, which will be difficult to find. France’s debt-to-GDP will likely rise beyond 100% as a result. […] Importantly, he is taking the right approach to address the protesters’ concerns. He gives out handouts—which risks inflating the fiscal deficit—but does not backtrack his supply-side reforms.”

Recognizing his newfound vulnerability, they also offered a note of caution:

“Of course, we now have to watch how much he may lose his ability to legislate additional pro-growth reforms beyond the ones he has already delivered.”

Meanwhile, analysts at ING argued that Macron got off relatively lightly in recent weeks, noting:

“The measures he proposed point to moderate effects on growth and the budget deficit. If they will be enough to stop the protests, it will be a cheap victory. […] Business confidence fell in November, [and] is likely to reinforce the fears related to the effects of the movement at the beginning of [next year]: if [confidence] stabilizes around this level in the first quarter as we expect, it would be consistent with growth of between 1.0% and 1.5% in 2019.”

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