Macron faces Kwarteng moment over pension reforms
After unrest in France forces a U-turn, markets will punish the country for its broken social model
If you think Britain is virtually impossible to get around this week, as a fresh round of strikes cripple the transport network, there is one small consolation. At least you are not in France. Today the unions will bring the country to a halt once again, with industrial action planned for the railways, for air traffic control and possibly for industries such as power generation as well. A few tweaks to the pension system proposed by Emmanuel Macron are once again triggering wave after wave of protests.
So far, so normal. In France, any whisper of even a minor reform to the country’s fantastically generous welfare system always provokes a furious backlash. Whoever is unfortunate to be occupying the Elysée Palace on the day typically backs down. This one, however, will turn into France’s Kwasi Kwarteng moment. Like the short-lived chancellor’s ill-fated mini-budget, here is a round of reforms that, while perfectly sensible, makes the markets realise that the debt involved is unaffordable. France has the third highest debts in the world, a huge structural deficit and an ageing population that refuses to work for longer. When Macron backs down on pensions – as he inevitably will – investors will realise that the country’s social model is unsustainable and they are not going to get their money back. And the fallout from that will get very ugly.
It is hard to see how anyone in their right mind could disagree with Macron’s pension reforms. The retirement age will be modestly raised from 62 to 64 over the course of the next six years, along with minor increases in the social security contributions needed to qualify for that. It is hardly earth shattering. Even by 2030, a retirement age of 64 will be significantly lower than most comparable countries, and with an average life expectancy of 82, will still give people 18 years in which to enjoy their pension. Given that pensioners already account for a quarter of France’s population of 68 million and life expectancy is still rising, retirement ages clearly need to go up. In most countries that is not seen as controversial, especially if it is introduced in stages. In France, it is unacceptable.
Macron will back down. There is little question about that. He may have been re-elected to the presidency last year, but he lost his majority in Parliament. He couldn’t reform pensions when he was at the peak of his political power in 2018 and it seems impossible that he will succeed now. C’est normal, as they say in France. Reforms are proposed, there are some strikes, a few riots, the plans are scrapped and everything goes on as before. It happened under Macron five years ago, under Nicolas Sarkozy a decade earlier and under Jacques Chirac a decade before that. But this time will be different.
Britain’s debts are bad enough but France’s are catastrophic. Total debt has risen to 114pc of GDP, well above the 99pc the UK is expected to hit this year. The budget deficit is still running at 5pc of GDP this year, with only a vague commitment to bringing it down. France’s total government debt last year overtook Italy’s to become the third largest in the world after the United States and Japan, both far larger economies: France’s debt per capita stands at $46,000 (£37,000) compared with $40,000 in the UK, and $37,000 in Greece. The trade deficit is running at more than €100bn (£88bn) a year and rising all the time. Its overseas investments are negligible, and dwindling with every year that passes. On any measure you care to look at, this is a country that is persistently living beyond its means.
Sure, it has some excellent infrastructure, and some world-class companies such as the luxury goods empire LVMH, but it also has one of the largest governments in the world (accounting for a scary 55pc of GDP, the highest in the OECD) and a bloated welfare system. Pension entitlements are incredibly generous, with train drivers, for example, able to retire at 52. Even worse it is completely unfunded, with the taxes of working people used to pay for the benefits of the retired. By the middle of the century, every six employed people will be paying for five pensioners. It is not remotely affordable. Even more than the UK, France is a relatively poor country that still acts like it is a rich one and demands more and more generous benefits from the state.
When Macron gives in and accepts that the pension system will simply be paid for with more borrowing, it will trigger the Kwarteng moment. The markets will figure out that the debt is not coming down, that neither this president, nor his even more reformresistant successors, will be able to change anything, and the bills will simply be dumped on to the bond markets to pay for forever. We will have to see how that plays out.
Unlike the UK, France shares a currency with its neighbours, but it has a massive and liquid bond market, and some major global banks. One point is certain. Once the markets lose faith in a country’s political class, as they did in the UK last September, they find an instrument to attack. It is just a question of which one. France will witness strikes today and for the rest of next month. The protesters may imagine nothing much will change.
But when it comes, the collapse of confidence in French debt will be brutal and sudden – and impossible for any government to ignore.