On French Pensions, Protests and Potential New Elections

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With everything going on in the banking world right now, it takes a lot to draw eyeballs away. But France managed it to an extent this week, when President Emmanuel Macron’s party rammed through a measure raising the retirement age without a vote in the National Assembly. This followed weeks of protests and debate—and triggered a fresh round of unrest Thursday and Friday. Now the opposition has called a No Confidence vote for next week, which could trigger new elections if it passes and Macron dissolves the Assembly. We don’t know how things will pan out, but we do think gridlock is all but assured.

Raising the retirement age from 62 to 64 by 2030 has topped Macron’s agenda since his first term. Then, the Yellow Vest protests over fuel tax measures and the pandemic jointly took pensions off the agenda. 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.

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. But the public lashed out, and protests have plagued the country for weeks—leading to piles of uncollected garbage throughout Paris, among other, less stinky manifestations. This made it especially thorny for the center-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. So when it became clear that they wouldn’t have enough votes in the lower house, the government used Article 49 of France’s constitution to bypass the chamber and enact the measure.

That decision has not gone down well with much of the public. Protests have brought much of the country to a standstill, and opposition parties are seizing the moment. A group of centrist rebels tabled a No Confidence motion Friday, which the leftist Nupes coalition has said it will support. National Rally leader Marine Le Pen has alternately said her party will file its own No Confidence motion and support one tabled by another group. That leaves Les Republicains as kingmakers when it comes to a vote next week.

If the motion passes, then Prime Minister Elisabeth Borne and her government will likely resign. Theoretically that would put the divided chamber back at square one—having to pick a new government, which is rarely simple in a hung parliament. But Macron’s labor minister said last year that if the government lost a confidence vote, Macron would dissolve the National Assembly and call new elections. We suspect this is not an appetizing prospect for Renaissance or Les Republicains, given the party has long supported raising the retirement age. They probably all saw the Dutch Farmer-Citizen Movement win a surprise plurality in Thursday’s Dutch provincial elections (which determine the Senate’s makeup), capping off months of grassroots campaigning and protests over the government’s decision to close down farms on edicts from Brussels rather than legislated agricultural policy. The fear of losing their seats to populist challengers likely runs hot—and probably isn’t unfounded.

Time will tell which incentives prove strongest. But either way, we think France will get gridlock for the foreseeable future. Even if the current government survives, its political capital is virtually nil, making it highly unlikely Macron passes big legislation for the rest of his term. Same goes if the government falls and there is no new election. A government led by populists on the left or right would be at odds with Macron’s centrists—and a new centrist government would just extend the status quo. We suspect fresh elections would probably bring an even more divided assembly than the present, fueling inaction.

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. Reforms, however beneficial they might seem on paper, tend to create winners and losers and stoke uncertainty. Gridlock, however frustrating for voters, reduces uncertainty and enables risk-taking.

As for the pension reforms, it isn’t clear whether they will stick. Opposition parties have a couple different avenues to overturn it, including a public referendum or an appeal with the constitutional council. Either way, we don’t think it makes much difference to French stocks in the here and now. State pension funding is a very slow-moving issue and outside the 3 – 30 month window stocks focus on most. Meanwhile, 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.^[i] We daresay it has gone up a bit since then, parallel to other developed countries, but that ratio was among the world’s lowest and not at all consistent with a crisis-in-waiting.

In the near term, this dust-up stokes some uncertainty for French stocks. But as the outcome becomes apparent and uncertainty eases, the reality of gridlock should become more clear. Politics are just one driver, but on that front, we see tailwinds for France—not to mention the broader eurozone, where gridlock similarly reigns.