Like most major Western economies France faces a major threat from inflation which reached 5.1 percent in March. The soaring cost of living has become one of the top issues for French voters with fears the president could face another protest movement like the gilets jaunes who previously hit out over fuel taxes and minimum wages. A particular driver of inflation currently in Europe is energy prices with energy security pushed into the spotlight by Russia’s invasion of Ukraine. So far the Eurozone has largely stayed away from a complete ban on Russian energy imports despite far reaching economic sanctions, with Germany warning of a likely recession if a US style embargo came in.
While the prospect of widespread recession in the Eurozone remains someway off, soaring inflation and struggling growth remain key problems for now.
Charles Mangin, Head of FX Trading at Crown Agents Bank, noted: “During the second round (Macron) shifted some of his policies to the left side to lure Melenchon voters.
“Addressing the higher cost of living and working on peoples buying power will be his top priority.
“He also made the pledge that ecology will be at the centre of his policies with the Prime Minister being in charge of policies for the subject.
“He had pledged for a retirement age of 65 years, but already started to weaken and mentioned 64 in the second round, pushing the reform will create tensions and we could see social movements if not properly put forward.”
According to Jessica Hinds, Senior Europe Economist at Capital Economics, a key next step for Mr Macron will be achieving success in the June parliamentary elections in order to help push his agenda forward.
In particular he will need support for the planned pension reforms which will see the pension age raised from 62 but indexed to inflation taking the minimum amount higher.
She explained: “Another strong result would give him a much clearer mandate and would provide him with an easier legislative path, especially on the more controversial topics such as pensions reform.
“But a more fragmented National Assembly would make his life much harder; leaders of other parties have stated that he and his government will not have a blank cheque.”
Opposition to pension reform is equally likely to come from the public though as well as the political opposition.
Christopher Dembik, Head of Macro Analysis at Saxo Bank, warned the focus on pension reform was “clearly a mistake.”
He said: “If President Macron wants to raise the legal retirement age from 62 to 64 around 2027/28, this will lead to major demonstrations in France, potentially similar to what has gone before with the yellow vest movement.
“The main focus should be to address issues related to the cost of living.
“So far, the government considers inflation as temporary.
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“At Saxo, we consider this is a mistake, and inflation is at least partially structural.
“Expect demonstrations in France once the summer break is over.”
Beyond inflation, the French economy faces a number of issues as it recovers from the pandemic with weak growth and a growing debt burden.
Melanie Debono, Senior Europe Economist at Pantheon Macroeconomics, explained: “President Macron faces an uphill battle in dealing with structural weaknesses in the economy, namely reforming the country’s still-rigid labour market in order to boost productivity and in turn the economy’s potential GDP growth rate.
“Note that the unemployment rate, at 7.4 percent in February, was relatively high compared to France’s EZ peers; the rate is higher only in Spain, Greece and Italy, countries which were hit much harder by the global financial crisis and the pandemic.
“Boosting the potential growth rate would, in turn, help bring the public debt ratio down; debt was at 113 percent of GDP at the end of last year, above the EZ average of 95.6 percent, according to data released just last week by eurostat.”