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France has been downgraded by S&P Global in a blow to Emmanuel Macron’s credibility as the caretaker of the economy, once the bright spot of his presidency.
The credit rating agency changed France’s long-term issuer rating from AA to AA- with a stable outlook, citing concerns that the trajectory of government debt as a share of gross domestic product will rise until 2027 and not fall as previously predicted.
S&P also said lower-than-expected growth was a factor. He expressed concern that “political fragmentation” would make it difficult for Macron’s government to implement reforms to boost growth or “address budgetary imbalances”.
The cut risks hastening major political fallout for Macron, but the financial impact is likely to be limited as was the last time significant cuts were made in the wake of the Eurozone crisis nearly a decade ago.
The bad news for public finances comes as Macron’s centrist alliance is poised for a landslide defeat in the June 9 European elections. According to Ipsos, polls show it is 17.5 points behind Marine Le Pen’s far-right Rassemblement national party. Opposition parties are preparing to debate two no-confidence motions on Monday to challenge the government’s handling of the budget, although at this stage they have little chance of passing.
Macron no longer boasts 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 downgrade by S&P is legitimate because, of all the countries in the Eurozone, only two are left with such high debt-to-GDP ratios that they are deteriorating – France and Italy,” said Charles-Henri Colombier, director at the Rexecode Economic Institute. “It’s a warning to the government that it needs to do more to cut spending, not just seek to boost growth.”
The government has been bracing for a cut since it revealed in January that its deficit was wider than expected last year, at 5.5 percent of GDP compared with a forecast of 4.9 percent.
While deficits are typical in a country that hasn’t balanced its budget in decades, the eurozone’s second-largest economy suffered an unforeseen shortfall of 21 billion euros in tax revenue in 2023.
The situation has shown the limits of Macron’s strategy since he was first elected in 2017 – to cut corporate taxes and enact business-friendly reforms in a bet that such moves will boost growth enough to pay off. France’s generous social welfare model.
While unemployment has fallen to its lowest levels in decades and foreign investment has increased, the government has continued to spend heavily on public services, as well as on emergency measures to protect businesses and households from the consequences of the pandemic and the energy crisis.
This has widened the deficit and led to an increase in the national debt.
When interest rates were low, the consequences were few, but borrowing costs have risen from €29bn in 2020 to over €50bn this year – more than the annual defense budget. They will reach 80 billion euros in 2027.
France says it still aims to bring its deficit back to 3 percent of output, an EU threshold, by 2027, the end of Macron’s second term. However, economists see it as highly unlikely, and S&P’s new forecast is for the deficit-to-GDP ratio to remain at 3.5 percent 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 measures to reduce the budget deficit. . . the reforms will not be enough for the country to meet its budget objectives”.
General government debt as a share of GDP “will increase steadily” 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 policies to subsidies for the employment of apprentices in order to cut another 10 billion euros this year, following cuts of 10 billion euros in January.
At least another 20 billion euros in cuts will be needed next year, according to the budget ministry, but the risk is that these will hurt growth.
The government has also insisted it will not raise taxes on households or companies, a hallmark of Macron’s economic policy. Opposition parties have criticized the stance as unrealistic given the hole in the budget.
The government forecasts growth of 1 percent this year, higher than the Bank of France’s forecast of 0.8 percent.
Experts have said the S&P downgrade is not expected to have a major effect on French borrowing costs because investors still see the country as a credible entity. The spread between German and French 10-year bonds has narrowed slightly this year.
“Our debt easily finds buyers in the market,” Le Maire told Le Parisien newspaper after the landing. “France still has a high-quality reputation as an issuer, one of the best in the world.”
