RaboResearch - Economic Research

The Third Round of French Elections


  • On April 24, Emmanuel Macron won a second term as president of France. His center coalition is currently in the lead to win a majority in parliament, and if it does, he will likely push an agenda focused on economic reforms, more autonomy, and further European integration. However, if he isn’t able to muster a majority, his hands will be partially tied.
  • There is a chance that the left-wing coalition could block Macron from gaining a majority. In this case, Macron would have to find support from other parties, most likely Les Républicains, Parti Socialiste, or Europe Écologie Les Vert.
  • The chances of a left-wing or right-wing majority are very slim, but either would lead to a completely different policy agenda.

The Third Round of French Elections

On April 24, Emmanuel Macron, the incumbent president, won another five-year term. However, winning the presidential elections is only the first step in securing a firm base to govern. On June 12 and 19, French citizens will head back to the ballot boxes to elect the members of parliament. There are a total of 577 seats for grabs, and the votes will be cast in a two-stage election process in which two, three, or four candidates can survive to the second round. The candidate that wins in the second round does not necessarily have to win the popular vote in the constituency. In this way, a party (or coalition of parties) that does not have the popular vote can still command a majority in parliament.

According to the most recent polls, Macron’s center coalition, Ensemble, is set to win around 330 seats, enough for a majority (289 seats or more). Although the left-wing coalition has gained some seats in the most recent polls, it is likely that Ensemble will be able to keep a majority. If it doesn’t win this parliamentary election round, Macron’s hands will be tied to a significant extent, as he would have to find a compromise with other political leaders.

Figure 1: Ensemble is set to win a majority, according to the latest polls
Figure 1: Ensemble is set to win a majority, according to the latest pollsSource: Harris Interactive

If another coalition is able to muster a majority, a situation called cohabitation, Macron could still resort to Article 49.3 of the French constitution, which would allow him to pass a bill without actually putting that bill to a vote in parliament. The only way that a bill can then be stopped is via a vote of no confidence. Although Article 49.3 is a very potent weapon, it is not without hazards and so would need to be used wisely and sparingly. Macron’s government survived two votes of no confidence when it tried to pass a controversial pension reform bill in 2020, but this was when Macron had a parliamentary majority. Without a majority, the chances that a no-confidence vote will pass are much higher. Rumors that Macron wants to use the article floated as early as the day after the presidential elections, as Bruno Le Maire, the current finance minister, would not guarantee that the government will not use Article 49.3 to move forward with its plan to raise the retirement age to 65.

Left, Right, or Center Legislature?

Although Macron won the presidential elections with a significant lead over Marine Le Pen, a simple victory in the legislative elections isn’t a certainty. A part of the electorate that voted for Macron was more motivated to keep Le Pen out of office rather than to keep the incumbent in office. Only 42% of the people that voted for Jean-Luc Mélenchon in the first round voted for Macron in the second round, while 45% abstained from voting. This means that Macron’s presidential election victory, while solid at first glance, might not be a reliable indication of an easy win on June 19. However, it is still our base case given the fact that Ensemble is ahead in the polls and the fact that the two-stage election process favors moderate candidates (more on that later).

We envisage four potential scenarios. We assign a 60% probability to the scenario wherein Macron’s alliance secures a working majority. The chance that a coalition led by Mélenchon or Le Pen will be able to command a majority is small in our view (4% and 1% respectively), but they may be able to deny Macron a majority in parliament (35% probability).

While there are considerable ideological differences between the possible coalitions, there is still some overlap. So regardless of the outcome of the elections in June, we can expect the new government to press on with those topics. Both the center coalition as well as Rassemblement National (RN) agree on extra funding for nuclear energy plants, while both parties on the extreme left and extreme right agree on withdrawing from NATO’s integrated command structure, treading European laws, prioritizing French law over European law, and renationalizing some domestic infrastructure, such as the motorways.

We have summarized the expected economic effects of the possible scenarios in the table below. In the following sections, we describe the four scenarios and later elaborate on the specific economic implications.

Table 1: Overview of expected economic effects
Table 1: Overview of expected economic effectsSource: RaboResearch

Scenario 1: A Coalition of Center Parties Wins

Macron’s most natural allies are the Mouvement Démocrate (MoDem), a center-right pro-European party, Horizons, the center-right party of former prime minister Édouard Philippe, and a number of smaller, center parties. It is quite likely that this coalition will be able to secure a majority. The two-stage election process favors more moderate candidates since left-wing voters are more likely to vote for the moderate candidate in a standoff between a moderate and right-wing candidate in the second round and vice versa (a situation described by the median voter theorem). Additionally, the predicted low turnout could favor Macron’s coalition. Macron has done particularly well with elderly voters and voters with some form of higher education, two groups that traditionally show a relatively high turnout. Therefore, it comes as no surprise that Ensembleis ahead in the polls (see Figure 1).

Still, a majority in parliament does not guarantee smooth policy implementation. This was made painfully clear by the ‘gilets jaunes’ (yellow vest) protesters in 2018. The current environment contains plenty of risks of another populous backlash for Macron’s agenda. Rising inflation may put more pressure on Macron to dampen the blow to consumers’ purchasing power or to postpone a (costly) transition to a greener economy (which would clearly go against the European grain!).

Given the fact that Renaissance (the new name of Macron’s party) is the dominant party in the coalition, the program of the coalition will most likely show a significant overlap with Macron’s program for the presidential elections. One of the major topics will be the statutory retirement age. In the presidential campaign, Macron announced that he intends to gradually raise the retirement age to 65. Currently, the official retirement age is 62, while the effective retirement age is somewhat lower, at 60.8. However, he also intends to raise the minimum pension to EUR 1,100 (from EUR 917). Institut Montaigne, a Paris-based thinktank, estimates that this, on balance, would save roughly EUR 8bn annually.

Figure 2: A higher retirement age will improve the working age population to retirees ratio, but demographics are dominant in the long run
Figure 2: A higher retirement age will improve the working age population to retirees ratio, but demographics are dominant in the long runSource: United Nations
Figure 3: France’s retirement age is low in comparison with its peers
Figure 3: France’s retirement age is low in comparison with its peersNote: These figures include adjustments to retirement age up until 2030. Source: National governmental websites

Another eye-catcher is the center coalition’s investment agenda. One of the spearheads of Macron’s campaign was the idea that Europe (and France) ought to decrease dependence on foreign powers in sectors such as semiconductors, energy, the digital industry, and space in order to foster strategic autonomy. Macron wants to earmark EUR 30bn for research and innovation. In this regard, Macron has a pretty solid track record. In 2019, he set the goal to have 25 French ‘unicorns’ (or startups valued over EUR 1bn) by 2025. He already managed to achieve this by 2022.

Additionally, Macron has a clear vision on how to further reform the labor market. He wants to focus on continued education and vocational training reform. In the past five years, he has managed to make long-term contracts more favorable for employers and has employed a EUR 15bn training scheme for the long-term and youthful unemployed. The unemployment rate dropped to just above 7%, just shy of the goal Macron set. The next goal he has set is to reach an unemployment rate of 5% in 2027. Obvious headwinds are the high inflation and the looming economic recession, but if the economic contraction turns out to be shallow and (relatively) short lived, the medium-term outlook for the labor market could still be bright given the success of the past five years.

Macron also aims to meet the EU budget deficit rules by 2027. However, Institut Montaigne estimates that Macron’s plans (and thus the plans of the center coalition) will not put France on a trajectory towards sustainable public finances. The discrepancy is mainly on the degree to which Macron’s plans will save money. Even taking the additional growth effects into account, they find that the annual deficit will be significantly higher than the 3% cap allowed under the Stability and Growth Pact (SGP). The focus on domestically produced strategic goods could provide some upward pressure to inflation, but we don’t see any major changes with respect to our baseline.

Scenario 2: The Center Coalition Is Not Able To Muster a Majority

Even though we have assigned a pretty high probability to our base scenario, it is by no means a certainty that the center coalition will be able to secure a majority. If the center coalition cannot secure a majority, it will have to find support from other parties on a case-by-case basis. This does not fully cripple the center coalition, but it makes the process of governing a lot less predictable and efficient.

The parties that are most likely to support the center coalition are parties close to the center, such as the center-right Les Républicains (LR) and the center-left Parti Socialiste (PS) and Europe Écologie Les Verts (EELV). While these three parties command a sizable number of seats in the current parliament (the parliamentary right and parliamentary left coalitions won 181 seats, or 31% of the total seats, in 2017), the polls indicate that this probably will not be the case after the next round of elections. Current polls put the combined seats of LR and PS between 55 and 105, with EELV set to gain only 1 to 5 seats.

This would be particularly problematic for Macron’s plans to reform the pension system since the only other party outside the center coalition that is opting to raise the retirement age is LR. Most parties are campaigning to freeze the retirement age at 62, while some parties on the (far-) left and right argue that the retirement age should be lowered to 60.

The center coalition will most likely be able to find support for a broad range of environmental policies. Plans to build extra nuclear power plants would be supported by the right side of the political spectrum, while the left would cheer at subsidies for electric vehicles and broader commitments to reduce greenhouse gas emissions. Additionally, it will probably be relatively easy to find consensus on extra investments in education and research given the broad support for those topics from different parties.

But for most policy areas, it will be much harder to get laws through parliament and will require horse-trading on a case-by-case basis. This will make it tougher to advance economic reforms (in the labor market for example), and it could be quite costly to build consensus in a fractured parliament that operates on a quid pro quo basis. We therefore expect economic growth to be lower compared to our base case, while inflation would be at a similar level and public finances would likely be worse off, as more spending would be required to keep parties on board in negotiations.

Scenarios 3 and 4: A Left- or Right-wing Coalition Gains a Majority

Even though the chances of either a left-wing or a right-wing coalition winning a majority in parliament are pretty slim, the impact would be profound. If one of them is able to secure a majority, it would most likely be the left-wing coalition, led by Jean-Luc Mélenchon.

A Left-wing Victory

Shortly after the results of the presidential elections on April 24 came in, left-wing politician and leader of La France Insoumise (FI), Jean-Luc Mélenchon, called on French voters to help him become prime minister. This didn’t go down well with Parti Socaliste and Écologie les Vert at first, but Mélenchon still managed to unite those parties together with Parti Communiste Français and his own party in an anti-Macron coalition. The parties are now campaigning under a common program and running a single joint candidate in the elections.

The program focuses on raising the minimum wage to EUR 1500 net, lowering the retirement age to 60, and maintaining consumer purchasing power. The coalition also wants to push ahead with Mélenchon’s standpoints on the EU. During the presidential campaign, he called for a renegotiation of EU treaties and vowed to give French law priority over EU law in cases of conflict. The alliance stated that they will ignore or temporarily withdraw from EU fiscal rules, if necessary.

If the coalition of left-wing parties wins a majority, this will have a profound impact on government finances. For starters, it is very unlikely that Macron will be able to raise the retirement age and reform the pension system in this scenario. Even Article 49.3 will not be able to help him, since the left-wing coalition will have enough seats to win a no-confidence vote and oust Macron in this scenario. A left-wing coalition could find support to lower the retirement age to 60 (probably without PS but together with RN, which also advocates a lower retirement age for some). In this case, Macron would only have a suspensive veto and would be unable to stop the bill from being accepted a second time.According to Institut Montaigne, implementing Mélenchon’s retirement plans instead of Macron’s could cost as much as EUR 93.5bn more per year (EUR 85.8bn of extra cost instead of EUR 7.7bn of savings). Additionally, lowering the retirement age would shrink the working age population by about 4%, which roughly translates into a 3% shrinkage of the labor force (assuming the participation rate for 60-62 year olds is equal to that of 55-64 year olds).

Another point of interest is Mélenchon’s intent to reform the tax system. He proposes inclusion of 14 progressive tax brackets in the CSG (the tax system that raises funds for social protection measures). Although the exact thresholds for the brackets haven’t been communicated yet, the estimate is that this revision of the CSG could cost the French state as much as EUR 39bn annually. This shortfall is partially mitigated by applying 14 progressive tax brackets for the income tax as well, increasing the maximum tax rate from 45% to 65%. Additionally, capital gains would have to be taxed progressively as well, at similar tax rates as regular income from labor.

Figure 4: Even though the income distribution seems to be quite stable, the differences between the upper and lower quintile are considerable
Figure 4: Even though the income distribution seems to be quite stable, the differences between the upper and lower quintile are considerableSource: PovcalNet World Bank

From an economic point of view, there’s something to be said for a more progressive system of taxation, since the propensity to consume is higher for lower- and medium-income groups. Additionally, equal taxation of income from labor and income from capital gains would provide a stronger incentive to work compared to the current situation. It might also quell some of the unrest regarding dwindling purchasing power, since it is mainly low- and medium-income groups that feel the pinch of elevated inflation and stand to benefit from these tax reforms. A more progressive system of taxation, especially in combination with higher government spending, does, however, also create a fertile base for higher inflation. This is not necessarily a problem when in a ‘lowflation’ environment, but it may stoke a wage-price spiral in the current environment.

A Right-wing Victory

It is quite unlikely that the right will be able to unite in France. Éric Zemmour has called for a “union nationale,”but although he has not officially announced plans to run a legislative campaign, RN spokesperson Sébastien Chenu has already said the party would put up an opponent should Zemmour run. Other parties on the right, such as Debout la France (a Gaullist party), are unable to put in much weight, given their modest size. This makes the prospect of a right-wing majority quite unlikely. Nonetheless, it is quite likely that RN will be able to secure a significantly larger number of seats in parliament than last time around, when they only won 8 seats. In the current polling, RN stands to win 65 to 95 seats, replacing LR as the second biggest party in the French parliament.

Just like FI, RN proposes lowering the retirement age to 60. The only difference is that the retirement age will actually rise to 64 or 65 for those who have studied. Additionally, pensions would have to be reindexed to inflation. All in all, this is quite a costly business, estimated at around EUR 34bn annually for the five-year term. The macroeconomic effect is probably negative, both from a supply-side (this policy decreases the labor force) and from a demand-side perspective (pensions typically replace less than 100% of the last earned wage). Additionally, since this measure incentivizes starting a career early, it reduces the incentive to study and could thus have an impact on long-run productivity growth.

RN does not have very detailed plans for the French economy, but the most striking plan on its economic agenda is to lower (or abolish some) taxes for companies and to renationalize some motorways. Additionally, RN wants to improve access to funding for SMEs through a EUR 500bn national fund. Little is known about the exact details of this fund, but one can imagine that it will show some similarity with the German KfW. A set of measures to support consumers’ purchasing power, such as a reduction in VAT for fuels, electricity, gas, and heating, would also be costly but may well support the economy in the short run. With the yield on long-term French bonds having shot up by more than 100bps since the beginning of the year and the ECB ending its net purchases sometime soon, big plans that require a lot of future funding may suddenly look a lot more problematic as well.

All in all, it is unlikely that inflation would be structurally higher with RN in the lead. But a lack of detailed plans for economic reforms would probably not bode well for structural economic growth, and the pension reforms and tax cuts for companies would make public finances less sustainable.

Economic Outlook Under a Center Coalition

In our base case of a win for the center coalition, the medium-term outlook for France is still relatively bright. The proposed reforms for the retirement age and labor market could significantly increase employment numbers in France. French unemployment is still considerably higher than that of peers (such as the UK and Germany). This leaves plenty of room for improvement. The focus on innovation, technology, and additional funding for R&D may add to the structural growth prospects of the French economy as well.

That doesn’t mean, however, that the country will not face considerable challenges in the next one to two years as the inflation shock plays out and Europe tries to wean itself off Russian energy at the fastest possible pace. Because of the latter, we have penciled in a (very) mild recession at the end of 2022.

Table 2: Economic projections for France under Scenario 1
Table 2: Economic projections for France under Scenario 1Source: RaboResearch
Erik-Jan van Harn
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 3002 0936

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