The pensions crisis forcing France into a doom loop it can't escape

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Emmanuel Macron is trying to secure Europe's future in the teeth of Russian aggression with increased defence spending. But closer to home there is a more pressing financial crisis threatening to upend France's finances.
Once again, the French Government is teetering on the brink of collapse. But not because of spending on guns or tanks. Rather, it is over how much the state should fork out for its generous state pension system, which has become the country's most contested political and fiscal battleground.
Left-wing MPs are seeking to topple the administration of François Bayrou, French Prime Minister, with another no-confidence vote looming in the latest battle over the state pension age.
Macron faced down parliamentary opposition and street protests two years ago to pass legislation which would push the state pension age up from 62 to 64 – but his victory is not complete and the ongoing war is leaving French finances more precarious.
On the face of it, France's reform looks absurdly modest to those in many other countries.
Even raising the state pension age to 64 means France would remain the lowest in the G7 economies. It compares with much more radical plans in Italy, where the age is rising to 71 – suggesting that Rome is rather more serious than Paris when it comes to tackling its problems.
France spends more than 14pc of its GDP on public pensions, above almost every other nation in Europe, yet seems unable to accept even small steps to reduce the strain.
On top of that, there are further efforts to unpick the plans.
After negotiations between businesses and unions to tweak the measures ended in stalemate, the socialists in parliament filed a no-confidence motion against the Government.
Leo Barincou, senior economist at Oxford Economics, says leaders in France simply cannot agree – even though 'the state of public finances in France is dire'.
'There are fundamental disagreements on what pensions should look like, how it should be funded, whether we should limit the deficit by pushing back the retirement age or by increasing taxes on wages, which are already rather high,' he says.
'Most economists, me included, would say it makes sense to push back the retirement age.
'France is already taxed at a very high rate, and economically it is much better to keep a larger share of the population working later. It would have a lot of beneficial side effects in addition to just the accounting pension effects.'
That might be logical, but the government's position is weak – after last year's snap election left President Macron's party without a majority, he has had to rely on the support of opposition deputies to pass legislation.
It does not look like Bayrou will fall yet, as Marine Le Pen's far right National Rally (RN) said it would not join forces with the Left-wing on this occasion.
The Prime Minister himself has vowed to continue the 'difficult search' for a resolution to the pension dispute.
But the situation highlights the frailty of the French government at a time when it desperately needs to make more spending cuts, to try to rein in borrowing and pacify twitchy bond markets.
Neil Mehta, of RBC BlueBay Asset Management, says even surviving the pension row will not solve Bayrou's problems.
'For the government to collapse, the RN would need to vote against its plans. However, it seems likely that the RN will bide its time and wait for a more opportune moment, such as the upcoming budget season later this year,' he says.
'By doing so, they can further strengthen their leadership position and bolster their ambitions ahead of the 2027 presidential election.
'Meanwhile, political uncertainty in France continues to simmer beneath the surface, keeping investors on edge. This unease is compounded by the country's challenging fiscal dynamics, which urgently require a more sustainable path forward.'
France's national debt is placing even more pressure on negotiations.
The country's debt currently stands at 113pc of GDP, according to the IMF, compared to just over 100pc in the UK on the same measure and 64pc in Germany.
And it keeps rising – the French Government borrowed 5.8pc of GDP last year and is expected to run another deficit of around 5.3pc this year.
Even that apparent improvement is unlikely to last, as the figure is flattered by a temporary measure to raise more tax receipts from large companies, while the economy is struggling, worried households are saving instead of spending, and the threat of the trade war hangs over businesses.
The International Monetary Fund (IMF) predicts the debt will rise to 128pc of GDP by the end of this decade. Andrew Kenningham, chief Europe economist at Capital Economics, expects that by 2035 the debt will hit 135pc on current plans.
But if the French Government is serious about hitting Macron's defence spending targets, the picture will be even worse.
'It only raises more questions about where they will find savings from,' he says.
'If they do meet the Nato target and not make offsetting cuts elsewhere, it would be more like 147pc of GDP. That would push it above where Italy's debt is now.'
That is a serious problem for a Government which already faces rising debt interest costs and could trigger a fresh round of turmoil in bond markets.
But Barincou says there is no sign those spending cuts will be made.
'There is currently no political path towards reducing the deficit. There is no majority that could agree on reducing social spending. Taxes are already very high and raising them would be extremely unpopular,' he says.
'With this kind of very weak minority government that we have, it is extremely difficult to see how France could reduce its deficit. Pensions are an area to look at, because it is such a huge category of expenditure for France, but once again it is politically explosive.'
It sets the scene for a debt spiral and the looming spectre of fresh crises at every turn.
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