On French Pensions, Protests and No-Confidence Votes

Editors’ Note: MarketMinder Europe is politically agnostic. We favour no politician nor any party and assess developments for their potential economic and market impact only.

With everything going on in the banking world right now, it hasn’t been easy to draw the attention of commentators we follow. But France managed it to an extent in recent days, as President Emmanuel Macron’s government advanced pension reforms without a parliamentary vote last week and narrowly survived two resulting no-confidence motions in Parliament on Monday, amidst widespread protests.^[i] His government’s surviving the votes means the reforms are a major step closer to becoming law. But we think the episode really highlights how gridlocked the country’s government is, which we think is likely to prevent big change and keep political uncertainty low.

Raising the retirement age from 62 to 64 by 2030 has been a key component of Macron’s agenda since his first term.^[ii] Then, the Yellow Vest protests over fuel tax measures and the pandemic jointly took pensions off the agenda.^[iii] But pension reforms were back on his manifesto when he ran for re-election last year, and even when his coalition lost its majority in the National Assembly, he pledged to push them through.^[iv]

All available evidence we have seen suggests this was not a popular prospect in France. Macron argued it was the only way to shore up the state pension without big tax hikes or running up the national debt.^[v] But the public lashed out, and protests have plagued the country for weeks—leading to piles of uncollected garbage throughout Paris, amongst other, less stinky manifestations.^[vi] We assume this made it especially difficult for the centre-right Les Republicains Party, which Macron’s centrist Renaissance Party relies on in the National Assembly, to vote for the reforms—despite party leader Eric Ciotti’s support for the measure.^[vii] So when it became clear that they wouldn’t receive enough votes in the lower house, the government used Article 49 of France’s Constitution to bypass the chamber and enact the measure.^[viii]

As we have observed over the last week or so, that decision didn’t go down well with much of the public. Protests have brought much of the country to a standstill, and opposition parties sought to seize the moment. Hence, Charles de Courson, from opposition centrist party Liot, brought forward the first of two no-confidence motions—and nearly succeeded. Winning support from right-wing National Rally, left-leaning Nupes, some independent MPs and a few from Les Republicains, 278 voted in favour—just 9 short of passing.^[ix] The National Rally, headed by former presidential candidate Marine Le Pen, raised a second motion to remove Macron’s government, but only 94 lawmakers voted in favour.^[x]

So after much drama and anticipation, Macron’s government remains alive. There are two takeaways for investors, in our view: One, we will not have snap elections—reducing political uncertainty. And two, we think the close votes demonstrate deep political gridlock within the National Assembly. That also reduces uncertainty, as it seems highly unlikely to us Macron will be able to pass sweeping, disruptive legislation during the rest of his term. For French stocks, we think this is a fine outcome. For all the faults one might find with French economic policy from a philosophical standpoint—which is always and everywhere just an opinion—the country has grown nicely and delivered very nice stock returns in the long run.^[xi] Our research suggests that reforms, however beneficial they might seem on paper, tend to create winners and losers and stoke uncertainty. Political gridlock, although often frustrating for voters, reduces uncertainty and enables risk-taking, in our view.

Indeed, Monday’s results mean pension reforms are close to becoming law. But opposition parties have a couple different avenues to overturn it, including a public referendum or an appeal with the constitutional council.^[xii] In our experience, state pension funding tends to be a very slow-moving issue, outside the 3 – 30 month window our research suggest stocks focus on most. Hence, we don’t think it makes much difference to French stocks in the here and now. Meanwhile, we think France’s debt remains quite manageable with interest costs at just 2.9% of annual government revenues in 2020, the latest year for which full annual reporting is available.^[xiii] We daresay it has gone up a bit since then, parallel to other developed countries, but that ratio was amongst the world’s lowest and not at all consistent with a crisis-in-waiting, in our view.

In the near term, the possibility of further unrest may stoke some uncertainty for French stocks. But in our view, that is short term. In the longer run, we suspect markets will see that uncertainty is set to fall amidst the reality of gridlock. Our research suggests this is positive for stocks. Now, politics are just one driver, but on that front, we see tailwinds for France—not to mention the broader eurozone, where gridlock similarly reigns.