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Macron's Fiscal Easing May Enhance His Stature in Europe



Nearly eight years after the “Arab Street” shook the foundations of the Middle East in the Arab Spring, the “French Street” featuring protesters in yellow vests has forced President Emmanuel Macron into major policy changes to accommodate their alleged rural and working class demands. The “Yellow Vest” movement has dealt the first big political setback for the French president. It remains too early to gauge whether his actions will calm street protesters, whose demands have never been well articulated.  But already his placating moves are affecting the European political landscape.

Speaking to the nation with a display of contrition, Macron presented a series of dramatic steps designed to increase income for lower- and middle-class French citizens. The French government will cancel a planned tax increase on oil and gasoline and bring forward tax cuts on overtime pay. It has cancelled a planned tax increase for low-income pensioners, increased the after-tax minimum wage by 6 percent (by €100 per month) by bringing forward reductions in social charges and increases in wage subsidies.[1] And it has made bonuses paid at the end of 2018 free of income taxes and social security charges. If these actions do not stabilize the French Street, robust police action may be applied. Recent opinion polls suggest that Macron’s gestures have drawn widespread support, potentially blunting the political power of the Yellow Vests.

Not all of Macron’s announcements please the left. He ruled out reinstating the financial wealth tax abolished early in his presidency. As a result, France maintains only a relatively limited tax on real estate wealth, while it no longer taxes financial wealth outright. Given the Yellow Vests’ focus on economic inequality, keeping the wealth tax repeal seems surprising. The relatively low level of real estate wealth taxes in France[2] would seem an inviting target for a tax increase to compensate for the removal of financial wealth taxes. Or the real estate tax could be complemented by new levies on high-value land in urban and coastal regions. Such a step would affect many of the same upper income groups in France that benefitted from the sensible abolition of the financial wealth tax and help raise new revenue, while avoiding new taxes on labor.

Added up, these proposals are costly, estimated at €10 billion in 2019, while declining over time in subsequent years. In short, the French government has proposed a domestic fiscal stimulus in 2019 of perhaps 0.4-0.5 percent of GDP. Irrespective of what the fiscal multipliers are of these new measures and their effect on growth might be, given that France was already on track to run up a fiscal deficit of 2.8 percent of GDP in 2019, Macron’s new package will push France’s deficit above the Stability and Growth Pact’s (SGP) 3 percent deficit threshold. Therein lie major implications for France and Europe.

In France, the abandonment of fiscal restraint with a general focus on reducing taxes, especially for lower income groups, does appear to be a calculated response by Macron aimed at maintaining support for his broader structural reform agenda and even—in the longer run—to “starve the beast a little” and pave the way for future reductions in French government spending. By not pushing the costs of his new spending onto other stakeholders among employers and unions, he is seeking a wider scope to negotiate further reforms of France’s pensions and unemployment system in the future.

Around Europe, France’s bursting of the SGP threshold will be well received in Italy, where the government is  vigorously opposing the European Commission’s demands for fiscal restraint while indicating a new willingness to strike a deal. France’s breaking of the fiscal rules thus reduces Rome’s political isolation and may encourage the Commission to compromise and agree on a deal with the Italian government.

The French and Italian fiscal situations differ, however. French 10-year government bond rates are at 0.71 percent, less than 50 basis points above Germany, shielding France from the market pressures hitting Italy. As a result, France can easily finance its fiscal expansion, irrespective of what the Commission might do. Macron can also tell the Commission that, since his election in 2017, he has implemented important structural and labor market reforms worthy of the European Commission’s consideration before proceeding with punishments of France.

Macron could even point to the German experience in 2003–05, when Chancellor Gerhard Schröder overhauled the German labor market and social welfare state, while bursting the SGP’s 3 percent threshold. To be persuasive, however, Macron would likely have to promise even more structural reforms in coming years. These factors make EC sanctions against France unlikely. It might not seem fair to Rome, but Macron has a credible reform record and the Commission simply has too much vested in his success.

Another consequence of Macron’s new fiscal stimulus, however, could be the at least temporary halt of Franco-German joint EU initiatives, ushering in more political competition between Macron and Chancellor Angela Merkel of Germany. In 2017, Macron pursued fiscal rectitude in France in the hope of getting Merkel’s backing to pursue EU and euro area institutional reforms. Now that the institutional reform process has delivered little for the French president, it is unsurprising that Macron has given up on immediately restoring French fiscal credibility in the eyes of Germany. It took Chancellor Schröder several years to reform the German economy in the early 2000s, at the cost of his political career. Now the Franco-German relationship will be rooted in the success or failure of Macron’s broader reform program in improving France’s economic performance, not a few years of excessive deficits. Yet the immediate political costs for Macron in Germany will be real.

Another consequence of these developments could occur with upcoming European elections in late May 2019, during which Macron and his liberal allies will be looking to break the center-right European People’s Party’s (EPP) stranglehold on Europe’s top political jobs. Breaking the European Union’s fiscal rules will not make it easier for Macron and his party to get along with the more hawkish members of his new allies in the Alliance of Liberals and Democrats for Europe, or ALDE. Dutch prime minister Mark Rutte, who in addition to insisting on fiscal prudence also opposed most of Macron’s euro area reform proposals, will likely not be pleased. Yet at the same time, pursuing redistribution and fiscal stimulus at home while distancing himself from Merkel (the de facto leader of the EPP) may make it easier for Macron to work tactically with Europe’s center-left and progressive parties to overcome the EPP after the European elections. While Macron’s new spending may make the lasting alliance with ALDE more difficult in the European Parliament, it might actually increase his ability to influence who is selected for Europe’s next top jobs, including the next president of the EU Commission.

Author’s note: I am indebted to my current and former PIIE colleagues Olivier Blanchard, Álvaro Leandro, Nicolas Véron, Jérémie Cohen-Setton, Douglas Rediker, Ángel Ubide, and Jeromin Zettelmeyer for ongoing discussions about France that have greatly informed this piece.


1. The French government is intending to increase the negative income tax (i.e. government wage subsidy), the prime d’activite, for work carried out at the minimum wage (SMIC). See the French prime minister’s statement for details.

2. French real estate taxation is progressive and starts only at values over €800,000, reaching a mere 1.5 percent for structures exceeding €10 million in value.

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