Ratings agency Fitch has downgraded France’s sovereign credit rating, warning that President Emmanuel Macron’s reform agenda could bog down after the battle to raise the country’s retirement age.
The agency downgraded the eurozone’s second-largest economy to AA- with a stable outlook late Friday night, fearing that social unrest and political paralysis following the pension fight could limit efforts government to improve public finances.
“Political stalemate and (sometimes violent) social unrest pose a risk to Macron’s reform agenda and could create pressure for more expansionary fiscal policy or a reversal of previous reforms,” Fitch wrote.
The move is a blow to Macron just weeks after his government enacted a long-promised pension reform to raise the retirement age by two years to 64, despite months of street protests and stiff resistance. in parliament.
The president’s party lacks a parliamentary majority and may struggle to deliver on other priorities such as boosting jobs and cutting budget deficits while improving public services such as schools.
Fitch also said the government’s use of a constitutional tactic known as Article 49.3 to pass the unpopular pension reform without a parliamentary vote could “further strengthen radical and anti-establishment forces” in French politics. .
Finance Minister Bruno Le Maire, who recently presented the government’s plan to bring deficits in line with EU targets by 2027, said France remained committed to structural reforms.
“This decision is the result of a pessimistic assessment by Fitch regarding France’s growth prospects and its debt trajectory,” Le Maire said in a statement.
“He underestimates the consequences of the structural reforms adopted in recent months by the French government, [notably] unemployment insurance, pension and production tax reforms.
Fitch expects France to run a budget deficit of 5% of GDP this year due to weaker growth and higher inflation-linked spending, up from 4.7% in 2022. It predicts that it will then fall again next year as measures to help households with bills during the energy crisis are phased out.
The French economy increased by 0.2% during the first three months of the year despite the strikes, but inflation also rose in April to 5.9% year-on-year.
France’s “fiscal measures are weaker than those of its peers,” Fitch wrote, warning that its public debt, measured as a proportion of economic output, “would remain on a modest upward trend, reflecting relatively low budget deficits. substantial and modest progress in fiscal consolidation”.
The rating agency expects spending pressures to remain elevated in the near term, as a third of all spending – largely on social benefits and pensions – is indexed to inflation. However, he said the savings from the pension reform, which are expected to reach €17.7 billion by 2030, will be “moderately helpful” in the longer term.
It also forecasts that inflation in France will decline in the second half of this year, averaging 5.5% for the year before dropping to 2.9% in 2024.
The Mayor has repeatedly stressed the need to reduce public debt, as rising interest rates have pushed up annual debt service costs.
France has been rocked by months of protests and strikes against pension reform since January. Some smaller-scale protests are continuing and the unions plan to hold a large protest march on May Day.
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