France warns EU of 'excessive' deficit.

Add one item to the list of problems facing French President Emmanuel Macron less than two weeks before crucial legislative elections: potential financial sanctions from the European Union for failing to get the nation's ballooning deficit and debt under control.

The rebuke, announced in Brussels on Wednesday, highlights France's fragile finances at a time of political turbulence, as the far-right National Rally party, led by Marine Le Pen, and a left-wing coalition, the New Popular Front, appear increasingly positioned to form a new government that could weaken Macron's grip on power.

Macron threw French politics into disarray earlier this month by calling for early parliamentary elections after his party was defeated by the far right in European Parliament elections.

The tax warning from EU authorities has set the stage for a possible confrontation between Brussels and Paris. Both the National Rally and the New Popular Front have pledged to spend more on public services at a time when Macron is forced to find deep budget cuts of up to 25 billion euros ($26.9 billion) this year to improve the nation's finances. Opposition parties, however, are critical of EU institutions and want to loosen rather than tighten fiscal policy.

France has a debt of around 3 trillion euros, or more than 110% of gross domestic product, and a deficit of 154 billion euros, which represents 5.5% of economic output. The budget crisis comes after Macron spent huge sums to support workers and businesses during the pandemic lockdown. His government also provided subsidies to help families cope with a jump in inflation after Russia's invasion of Ukraine, which sent energy prices soaring.

EU rules typically require member countries to maintain budget discipline or face heavy fines if debt exceeds 60% of gross domestic product or if the budget deficit exceeds 3%.

Those rules were suspended after the pandemic, when all European governments spent aggressively to protect their economies. But Brussels reinstated them this year and warned ultra-high spending countries to quickly close the gap or face a so-called excessive deficit procedure, which forces indebted governments to negotiate with Brussels or potentially pay a fine.

France was not the only country reprimanded on Wednesday: six others, including Italy, Belgium and Poland, were found to be in breach of the bloc's fiscal rules. All these governments will start negotiations with Brussels, which could last years, in July. Romania, which had been warned about its deficit in 2020, was also flagged for not doing enough to repair its finances.

Brussels' rebuke raises the stakes for the party that will end up taking power in the French Parliament after two rounds of voting ending on July 7. The National Rally, which supports a protectionist “France first” economic policy, could have more influence than ever, pushing out Macron's centrist party and throwing Parliament into gridlock.

“None of these results are favorable for fiscal policy,” Mujtaba Rahman, European managing director of the Eurasia Group think tank, wrote in a note. “A far-right or united left-wing government would actually widen the fiscal deficit.”

Macron had already ordered his government to start getting its finances in order. European Economy Commissioner Paolo Gentiloni said Wednesday that despite the rebuke from Brussels, France was moving in the right direction.

But the political chaos unleashed by Macron by calling the elections scared investors who saw France as increasingly attractive for investments. They are now focusing on the prospect of instability if Macron is forced to govern alongside the Rassemblement National's top lieutenant, Jordan Bardella, a Le Pen protégé.

Bardella said that, if he were to take power, his first priority would be to address the cost of living crisis that has hit French families, mainly by cutting taxes on energy, gas and electricity costing “several dozen billion.” EUR. He would also cut income taxes for French people under 30 and encourage companies to increase wages by 10%, without charging them additional social security taxes.

Bardella this week backed away from some of his most expensive promises, including a plan to lower France's retirement age to 60, after independent economists estimated the cost of his overall program at around 100 billion euros, shaking the investors. French shares tumbled more than 6% last week before recouping some of their losses in recent days. The risk premium that investors demand to hold French government bonds over German ones, the eurozone benchmark, is near its highest level since 2017.

Investors also fear that the left-wing New Popular Front coalition will throw financial caution to the wind by promising to raise the minimum wage, reduce the retirement age to 60 and freeze prices on basic necessities, including food, energy and fuel. The party has said it will reject EU budget rules.

French Finance Minister Bruno Le Maire said this week that opposition parties would “widely open the floodgates of public spending at a time when we should be cleaning up our finances.”

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