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France has been downgraded by S&P Global, a blow to Emmanuel Macron’s credibility as steward of the economy, once the bright spot of his presidency.
The rating agency changed the rating of French long-term issuers from AA to AA- with a stable outlook, citing concerns that the trajectory of public debt as a share of gross domestic product would increase through 2027 and not fall as previously forecast.
S&P also said lower-than-expected growth in France was a factor. It expressed concern that “political fragmentation” would make implementing reforms to boost growth or “address fiscal imbalances” difficult for Macron’s government.
The downgrade risks causing significant political fallout for Macron, but the financial impact is likely to be limited, as was the case the last time significant downgrades were made in the wake of the eurozone crisis about a decade ago.
The bad news about public finances comes as Macron’s centrist alliance is poised for a broad defeat in the European elections on June 9. Opinion polls show the alliance trailing Marine Le Pen’s far-right national party Rassemblement by 17.5 points, Ipsos said. Opposition parties are preparing to debate two no-confidence motions on Monday to object to the government’s handling of the budget, although they have little chance of being passed at this stage.
Macron no longer has a parliamentary majority, so he has more difficulty passing legislation or a budget, although the French constitution allows the government to override lawmakers on budget matters.
“The S&P downgrade is legitimate because of all the eurozone countries, only two have such high debt-to-GDP ratios that are only getting worse – France and Italy,” said Charles-Henri Colombier, director of economics institute Rexecode. “It is a warning to the government that it must do more to cut spending, and not just stimulate growth.”
The government has been bracing for a credit downgrade since announcing in January that last year’s deficit was larger than expected at 5.5 percent of GDP, compared with a forecast of 4.9 percent.
While deficits are typical for a country that has not balanced its budget for decades, the eurozone’s second-largest economy faced an unforeseen shortfall of 21 billion euros in tax revenues in 2023.
The situation has shown the limits of Macron’s strategy since he was first elected in 2017: cutting taxes on companies and pushing through business-friendly reforms in the hope that such steps would boost growth enough to support the generous social welfare model of France to pay.
As unemployment fell to its lowest level in decades and foreign investment increased, the government has continued to spend heavily on public services, as well as on exceptional measures to protect businesses and households from the impact of the pandemic and the energy crisis.
That has widened the budget deficit and led to an explosion in the national debt.
When interest rates were low, the impact was minor, but financing costs have risen from 29 billion euros in 2020 to more than 50 billion euros this year – more than the annual defense budget. By 2027 they are expected to reach €80 billion.
France says it still aims to cut its budget deficit to 3 percent of output, an EU threshold, by 2027, the end of Macron’s second term. However, economists consider this very unlikely and S&P’s new forecast is that the deficit ratio will reach 3.5 percent of GDP in 2027.
“We believe that the French economy and public finances in general will continue to benefit from the structural reforms implemented over the past decade,” S&P said. “However, without additional budget deficit-reducing measures. . . the reforms will not be enough for the country to meet its fiscal targets.”
Public debt as a percentage of GDP “will continue to increase” to 112.1 percent of GDP in 2027, up from 109 percent last year.
Macron’s finance minister, Bruno Le Maire, has been scrambling to find savings on everything from climate policy to student hiring subsidies to cut another €10 billion this year, following cuts of €10 billion in January.
According to the Ministry of Budget, at least 20 billion euros in cuts will be needed next year, but there is a risk that these will affect growth.
The government has also insisted it will not increase taxes on households or businesses, a hallmark of Macron’s economic policies. Opposition parties have criticized the position as unrealistic given the gap in the budget.
The government forecasts growth of 1 percent this year, higher than the Bank of France’s 0.8 percent forecast.
Experts have said that S&P’s rating downgrade is not expected to have a major impact on French borrowing costs as investors still view the country as a reliable entity. The difference between German and French ten-year bonds has even narrowed slightly this year.
“Our debts easily find buyers on the market,” Le Maire told Le Parisien newspaper after the credit rating downgrade. “France continues to have a high-quality reputation as an issuer, one of the best in the world.”