The Daily Update - France and Greece

On Sunday the French voters head to the polls for the final round of the French Legislative Elections.  The first stage propelled Macron and his La République en Marche (LREM) into a controlling position: they secured 32.3% of the vote including his allies the MoDem party which secured 4.1% of the vote.  Projections have been pretty good indicators in France, and the latest Opinionway poll suggests LREM will get between 440 and 470 of the 577 available parliamentary seats.  The major casualty of Macron’s success is the Socialists which are projected to only gain 20-30 seats when they had controlled 331 going into the election.  The Republicans are expected to get between 70-90 seats.

Macron is projected to have a strong stable absolute majority of seats in the National Assembly and the power to push through his reform agenda and tackle difficult issues such as labour, structural reform and reducing the high level of unemployment down to a target of 7 percent by the end of his 5 year term.  Labour reform is key and the current focus but other aims include bringing the budget deficit down below the 3 percent, a level mandated by the EU, yet also investing €50bn while finding public spending savings of €60bn.

However, it is a challenging period to try and implement reforms particularly with much of the voter base around the globe fed up with austerity, stagnant wages and marked inequalities.  Macron will inevitably face resistance.  While he is attracting a large share of the votes, last weekend’s voter turnout of 49 percent was low and indicative of a high level of disengagement within society: the unemployment rate is 9.6 percent and youth unemployment is much higher at 21.7 percent.  Moreover, national figures mask huge disparities: in the metropolitan area the 8th district of Val-d’Oise voter abstention reached 67.9 percent!

Another interesting area to watch is how Macron’s government asserts themselves within the EU.  The Greek debt situation has been a contentious area given the differences of opinion on its debt sustainability.  Germany has been reluctant to offer debt relief but the IMF has stipulated their participation in the programme is contingent on Greece’s debt burden being made sustainable.  Macron has commented he favours some sort of restructuring as he views the current status quo as being unsustainable.  France advocates adjusting Greece’s debt repayment based on economic growth (i.e. pay more when growth is good and less when growth is weakening) much like Yanis Varoufakis’ proposal when he was Greece’s Finance Minister in 2015.  France saw this as a good compromise given the IMF is less optimistic on the outlook for growth than EU.

There was some ‘progress’ at yesterday’s Eurogroup meeting as this flexible repayment mechanism was agreed to along with a 15 year extension to repayment period to the second bailout loan of €130bn.  But with €7bn of the next approved disbursement of €8.5bn in ESM funding going to repay creditors over the next couple of months, the Greek economy having shrunk ~27 percent since 2008 and only managing to grow 0.4 percent in Q1, further work is likely to be needed on making Greece’s debt sustainable.  The IMF still need to know how much debt restructuring there will be before they can gauge the debt sustainability.   Hence there was an interim fudge whereby they joined the bailout by ‘approval in principle’ but will not release a loan of €1.8bn until they have greater clarity that sufficient debt relief will be offered to make Greece’s debt burden sustainable. Effectively, the ‘can has been kicked down the road’ for a few more months: with Greek central government debt of €320bn (180 percent of GDP), the IMF yet to unconditionally commit to the bailout and Greek bonds yet to be made eligible for Q€ it is difficult to see how Greece can meet all its funding needs from the market by the time the current programme ends in 2018.