We Can Dissolve the National Assembly, but Not the Debt

"We can't dissolve the debt, and that's a shame," Emmanuel Macron must have thought. "So let's dissolve the National Assembly and pass the hot potato on to those in the opposition who are chomping at the bit to come to power." Economy Minister Bruno Le Maire's whirring statements were running on empty, no one believed his promise to return to a budget deficit below 3% of GDP by 2027, and after Standard & Poor's downgraded the French economy on June 1, international fears were on the rise. "Ladies and gentlemen of the investment world, are you starting to be picky about France's government bonds? I'm going to put the Nouveau Front Populaire or the Rassemblement National in your faces, and we'll see how you react!"

This dissolution is totally irrational, but the President of the Republic has decided to go ahead with it, so we'll just have to live with it. A huge period of uncertainty is opening up, and the markets don't like it (the CAC 40 has wiped out all its gains since the start of the year). Neither do savers, as new taxes are announced in the media by the candidates. The Macronists swear they don't want to raise taxes, but they do plan to introduce a tax on share buybacks. The Nouveau Front Populaire wants to abolish the PFU (Prélèvement forfaitaire unique- the flat tax), restore the ISF (Impôt sur la fortune- the wealth tax), create new income tax brackets, and an exit tax for those who want to flee this tax hell! The more moderate Rassemblement National wants to abolish the IFI (Impôt sur la fortune immobilière - tax on real estate wealth) and replace it with the IFF (Impôt sur la fortune financière - tax on financial wealth), which risks driving this highly mobile wealth abroad. The RN maintains the PFU up to a cap of one million euros and proposes to create a tax on excess profits, a vague and difficult-to-define concept that will generate insecurity for businesses.

Polls indicate that the Macronists' chances of winning this election are slim, so we must be prepared for tax increases. This is very bad news, given that France already leads the OECD countries in terms of tax rates. Wealth creation and growth will pay the price. And the debt problem will return with even greater force...

What could go wrong? It's worth recalling the 'Liz Truss scenario', the short-lived British Prime Minister (from September 6 to October 25, 2022), who took office at 10 Downing Street with an ambitious £100 billion tax cut program (benefiting the richest but not the middle classes), albeit unfunded. Cutting taxes is all very well, but not only for the benefit of the wealthiest, and without counting on future growth to finance them, it's proving far too risky. We also need to cut public spending. The result: markets panicked, government bond yields soared to 3.7%, the threat of bankruptcy loomed, and Liz Truss was forced to resign, being replaced by Rishi Sunak.

With around half of its sovereign debt held by non-resident investors, France is subject to comparable constraints. The backlash would be immediate in the event of a whimsical economic policy. We often deplore the volatility and irrationality of the markets, and rightly so, but in the weeks and months to come, we can bet that they will be much wiser and more reasonable than the politicians...