Is France about to clash with the European Commission?

By
Pieter Cleppe
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French Prime Minister Michel Barnier (Copryight: "CC-BY-4.0: © European Union 2019 – Source: EP")

With the appointment of Michel Barnier (picture) as French Prime Minister, French President Emmanuel Macron has effectively made the French government dependent on Marine Le Pen’s National Rally. At any point, she could add her 142 assembly votes to the 193 held by the left to produce a majority that could bring down the Barnier government.

Le Pen and her party have stressed that they do not want to contribute to France’s “institutional disorder and democratic chaos”, pledging to “judge the new government on its acts”, thereby describing Barnier as a “prime minister under surveillance.” Senior National Rally officials have stressed to “demand a high price” for their passive support.

Now, Barnier has presented his team of Ministers, providing more clarity on what to expect. On two key policy areas, the EU institutions in Brussels will particularly focus: migration and the French budget.

When it comes to migration, the developments in Germany may actually make a clash between France and the EU less likely. There, the government seems to be panicking due to the rising support of the Alternative for Germany (AfD), as it has decided to impose – all in all modest – border controls.

A lot more challenging will be the French fiscal situation, which is in dire straits. In June, S&P Global Ratings downgraded France’s debt rating, warning “France’s public debt ratio is now the third-highest in the eurozone, behind Greece and Italy.”

In such a context, demands by the National Rally to increase the minimum wage are not making things easier. France has promised the EU to reduce its budget deficit to 5.1 percent, from 5.6 percent. That’s still far from the 3 percent budget deficit rule which the EU imposes.

France wants more time

Barnier has now trusted a little-known duo with the task of plugging the huge hole in the budget. 33-year-old junior lawmaker Antoine Armand will be responsible for the economy and finance ministry and Laurent Saint Martin, 39, a former socialist and head of the government office which promotes foreign investment in France, is the new budget minister. In a break with tradition, Saint Martin will report directly to Barnier, rather than to the finance minister, meaning that Barnier will have a lot of control over the budget.  

Will we see a big break with the past? That’s unlikely. As outgoing finance minister Bruno Le Maire has commented: “You won’t find in my desk drawer any miracle solutions for public finances, only solid detailed proposals to cut spending.” Thereby, it must be stressed these were mostly proposals.

The rumour is that France will ask Brussels for a two-year delay in reaching its 3% of GDP deficit, meaning achieving it by 2029 instead of 2027. In 2016, then-European Commission chief Jean-Claude Juncker openly admitted that France deserved some budget leeway “because it is France”. As much as more financially sound European governments won’t like France once again getting more time to bring its budget deficit in line with EU rules, the figure of Michel Barnier, who’s trusted in Brussels, is likely to make things slightly easier.

France’s interest rate spread with Germany rose after the presentation of the new government and its five year borrowing cost at one point even surpassed Greece’s, but at the end of the day, bond markets are no longer able to attack France as they used to. That’s because France is now a member of the eurozone and because the European Central Bank has proven not to be above monetary financing. That means unleashing inflation, so letting the savers pay, for the sake of avoiding government spending cuts. Once upon a time, such an approach was the preserve of banana republics.

Notably, Barnier has opened the door to raising taxes on France’s wealthiest individuals and some big corporations, supposedly to protect the lower and middle classes. Then, French taxation levels are already at the highest of the world and previous French attempts to go after the “ultra rich” have spectacularly failed.

Nuclear power and climate policy

A key aspect of the new Barnier government is its strong commitment to nuclear power. The new Economy and Finance Minister, Antoine Armand, has been a vocal critic of energy policies reliant on intermittent renewables, as he also chaired a commission of inquiry which warned that France’s security of supply had been neglected. It will be interesting to see whether this may lead to a clash with the European Commission, where von der Leyen has just provided two anti-nuclear zealots with energy policy responsibilities.

The fact that leading global financial institutions have just signed a statement in support of nuclear power may back up France in its upcoming clash with the Commission over this. It is yet more evidence how current climate policies are increasingly coming under strain. Instead of a punitive approach, which the EU has embraced, with its ETS climate tax, its climate tariff CBAM and its reporting obligations, an alternative approach has been championed by the “Climate & Freedom International Coalition.” Members of this group of academics and policymakers have drafted an international treaty, some kind of a free-market alternative to the collectivist “Paris Agreement,” whereby signatories would benefit from trade advantages if they implement climate-friendly free-market policies.

That includes market liberalisation and incentives to invest in “property, plant, and equipment (PP&E)” —assets crucial for long-term company growth—through tax-exempt “CoVictory bonds”, loans, and savings funds. It also includes targeted tax cuts (Clean Tax Cuts, CTCs) in the four sectors responsible for 80% of greenhouse gas emissions—transport, energy and electricity, industry, and real estate—as well as tax cuts aimed at breaking up monopolies. These ideas are also developed in a new study by the Warsaw Enterprise Institute and a number of likeminded think tanks, which describes these tax and market liberalization proposals in more detail, as well as “the impact of current restrictions on achieving climate goals”.

In recent years, nuclear power was looked at in a skeptical way by the European Commission. Last year, the European Parliament voted  to consider include nuclear energy of all types in a list of “net zero technologies”, after the European Commission only wanted to include innovative third and fourth-generation nuclear power technologies. The new French government can be relied upon to promote continuing on this path.

French protectionism or free trade?  

Also when it comes to trade policy, tensions between the new French government and the EU are on the cards. French Prime Minister Michel Barnier has reiterated France’s opposition to the trade deal between the EU and Latin American trade bloc Mercosur, confirming his desire to seek a ‘blocking minority’. As a result, it is unlikely a deal on this will be secured at the upcoming G20 summit in Brazil in November, as some had hoped.

Talks with Mercosur had been complicated after the EU demanded to add a sustainability annex to a trade deal that was already agreed. This was not appreciated by the likes of Brazil, Argentina, Uruguay and Paraguay. Brazil is now also deeply unhappy with the EU’s new deforestation rules. These aim to export the EU’s standards to fight deforestation the rest of the world. As a result, also other trading partners, from the United States to Malaysia, have demanded the EU to suspend implementation.

Last year, Malaysia and Indonesia even decided to freeze trade talks with the EU over the issue. They find it particularly unfair that despite NGOs like Global Forest Watch praising them in 2023 for achieving a sharp reduction in forest loss, the EU refuses to declare their standards as equivalent. This especially given that already an estimated 93% of palm oil imported into Europe is sustainable and that the UK does accept Malaysia’s anti-deforestation standard as equivalent. A game changer however is that Germany is now also demanding to at least postpone implementation of the new, burdensome regulation. German CDU MEP Peter Liese even called the EU’s new deforestation rules a “bureaucratic monster,” warning that the legislation could disrupt trade in essential consumer goods and jeopardize the EU’s animal feed supply.

Separately, diplomatic relations between the EU and Malaysia have been under pressure as a result of a court case fought in European arbitration courts, whereby the country was condemned to a massive 14.9 billion USD compensation to the heirs of the Sultan of Sulu. This gentleman ruled part of the region—which is today known as Sabah—in the 19th century. With apparent backing by litigation funder Therium Capital Management, the heirs filed a lawsuit against Malaysia after it stopped annual payments for a lease on their land, following an armed incursion.

Somehow, that lawsuit ended up in arbitration courts in Europe, where a Spanish arbitrator decided to rule in favour of the heirs, after moving the case from Madrid to Paris. Following attempts to seize Malaysian assets on this basis in Europe, the whole thing threatened to escalate into a diplomatic crisis, but that hasn’t happened. First, the Spanish arbitrator, Gonzalo Stampa, was criminally convicted for moving the case to Paris, as he had apparently ignored a Spanish court order to close the proceedings. This Summer, the Dutch Supreme Court rejected the recognition and enforcement of the arbitral award, handing a big win to Malaysia.

This surely will have played a role in the statement by the Malaysian ministry of Trade on 5 September to declare that it was ready to resume trade talks with the EU. That’s welcome but the EU should take notice that on 18 September, Malaysia ratified the UK’s accession to the Trans-Pacific Partnership deal CPTPP. This new trade deal with 11 Asian and Pacific countries covers a trade area of about 500 million people or 15 percent of world GDP. The UK was able to join partially due to its flexibility towards recognizing the standards of its trading partners, something the EU refuses to do. Hopefully, this may serve a useful lesson for the EU. Especially given the process of “decoupling” or “derisking” from China, the EU cannot afford to miss out on trade with the upcoming trade powerhouses of today’s world, which certainly includes South East Asia.

Conclusion

It must be recognized that Michel Barnier did a reasonably good job concluding an exit agreement with the UK that avoided most of the potential damage that could have resulted from Brexit, while offering the UK the opportunities to show the EU the way. At the moment, the UK is doing that, not only with its accession to the CPTPP trade deal, but also with not copying misconceived EU overregulation, like the AI Act. Barnier is unlikely to  sacrifice this legacy by completely obstructing any trade opening. Also when it comes on France’s eternal budget deficit problem, a compromise is the most likely outcome. Apart from being a trusted man in Brussels, Barnier has been daring to make some more firm statements about migration policy, so given the pressure of National Rally, a number of effective measures to end illegal migration may finally be taken. Also, members of his government are pro-nuclear and skeptical about EU climate policy. Perhaps Michel Barnier may very well be the right man at the right time.

 

 

  

 

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