Macron's festive gifts to France 'risk Italy conflict'
By Oliver Haill
Date: Tuesday 11 Dec 2018
(Sharecast News) - French President Emmanuel Macron doled out some festive sweeteners to his citizens overnight, risking a new EU conflict as it may drive the country's deficit above European budget limits.
Macron, who last year said he wanted to govern France like Roman god 'Jupiter', above the political fray, intervened on Monday to calm the 'yellow vest' protest movement that has seen several weeks of mostly peaceful but some eye-catching confrontations around the country.
In a televised address, Macron said: "I accept my share of responsibility. I may have given you the feeling that I didn't care, that I had other priorities."
He acknowledged that he had "offended some of you" with offhand remarks, did not react "quickly enough" nor fully grasped the problems of those struggling to make ends meet.
New measures were announced, including an immediate €100-a-month increase to the minimum wage, that overtime hours will not face tax or social charges, and a U-turn over the tax hike on pensions under €2,000 a month. Businesses were also asked to pay an extra end-of-year bonus. Businesses will be compensated for the costs of the minimum wage increase, possibly by a wage subsidy, he later explained.
The government estimated the measures would cost up to €10bn, equivalent to 0.4% of GDP. This is on top of the recently announced €4bn to cancel the fuel tax hike that sparked the yellow vest movement.
Macron will meet investment groups and business leaders in the coming days to see how they could contribute more to the economy.
The euro rose 0.3% against the dollar but fell 0.3% against the pound in early trading.
"This is a policy shift with immediate impact," said economist Kallum Pickering at Berenberg, estimating that the combination could push the 2019 deficit from 2.8% to 3.4% of GDP unless offset by savings that could be difficult to find.
"France's debt-to-GDP will likely rise beyond 100% as a result. This could also complicate the current conflict between the EU and Italy," Pickering said.
"The key difference, though, is that France is cutting taxes and spending some money to get pro-growth supply-side reforms through. Italy is spending more money to do exactly the opposite."
Pickering felt that, in the long term, Macron was taking "the right approach", as he has not backtracked on his supply-side reforms. "He is turning France into a better place to do business. As long as he continues with pro-growth supply-side reforms, the French economy can strengthen over time despite a cyclical slowdown now."
Bart Hordijk, market analyst at Monex Europe, said the European Union "may not join in the celebrative Christmas conga as this spending spree will send the French budget deficit far north of what European budget rules allow".
"The reaction of the Italian neighbours on this unpacking of gifts is uncertain at the moment; on one hand they may feel a pang of jealousy of the fact that France can spend without being reigned in, while at the same time their gift may be that they now have an ally in their revolt against EU budget rules, which they deem too stringent."
He said for those trading the single currency it was a tough call, as Macron's Christmas gifts could be a fiscal boost that stimulates the Eurozone's second-biggest economy, while the increased French deficit could be a threat to Eurozone's financial stability as well.
"Fears may very well be justified that the Italian government will use this as an argument to ramp up their spending after all, conveniently ignoring the fact that Italy's debt-to-GDP ratio is about 30% above that of France. It seems likely we can brace ourselves for headlines out of Rome in the coming days that point to this, which will have Italian bonds and the euro suffer as a consequence."
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