Pension reform will face fierce opposition in parliament and on the streets
FrontierView believes there is a 60% chance that pension reforms will pass. If successful, the reforms are expected to boost business confidence in two ways. First, it would signal that France is serious about getting its fiscal house in order. This would curtail potential upward pressure on sovereign debt yields and, by extension, lending rates for businesses and households. Second, it would improve the legislative prospects for the current government, reducing uncertainty and encouraging investment. If, however, the reforms fail or are significantly watered down, there is the risk that an emboldened opposition proves even more obstreperous, increasing the prospect of early elections and worsening France’s investment prospects. In the long run, France would need to make cuts elsewhere to meet its pension obligations, which could reduce demand for B2G offerings. Alternatively, the government could seek to raise tax revenue, which could soften B2B or B2C demand.
Overview
On January 10, the government announced details of its pension reforms. This is President Emmanuel Macron’s second stab at pension reform, following previously unsuccessful attempts by President Nicolas Sarkozy and President Jacques Chirac. Notably, it is far less ambitious than the plan Macron abandoned in March 2020, reflecting his loss of a parliamentary majority.
The legislation consists of two changes that are unpopular with French workers. The headline reform relates to the retirement age, which would rise from 62 to 64. However, this would still be lower than other core eurozone countries, such as Spain and Germany. Additionally, the pension age would increase gradually, rising by six months every year, softening the reform’s impact. The number of years of work required to claim a pension would also rise to 43 years.
Our View
The passage of pension reform is necessary for both financial and political reasons. Regarding the former, France spends around 14% of GDP on pensions, a higher rate than most other OECD countries. Unfortunately, French workers aren’t contributing enough to cover the costs of their retirement. Although the pension system returned to surplus territory in 2021 and 2022 thanks to a post-COVID surge in economic activity, the independent COR expects it to fall back into the red, with a deficit of around EUR 10 billion per year forecast up to 2032. The government would have to step in to fill this hole, undermining its efforts to bring the deficit back below the 3% level set by the EU.
Macron’s credibility is highly dependent on his ability to deliver on this campaign promise. If the bill passes, the government has a higher chance of facing down opposition to future legislation. However, if it fails, the momentum will be with opposition parties, which could further complicate the legislative environment. Faced with an ineffective government, Macron could decide to call fresh elections, heightening political uncertainty.
The road to passing pension reform will be extremely bumpy, testing the government’s resolve. Polls show that nearly 70% of the population opposes the bill. Accordingly, unions have called for a national strike on January 19, and oil workers are threatening additional strikes on January 26 and February 6, risking a repeat of petrol shortages experienced during strikes held in 2022. More strikes are highly likely in the coming months, which means MNCs can expect disruption to economic activity throughout Q2 2023.
The 60% chance of the legislation passing depends on the support of the Les Républicains (LR). The newly elected leader of the center-right party, Eric Ciotti, said the party has “always supported the need for pension reform which leads to working longer,” but has stated that the reforms must be introduced more gradually. He’s also insisted that the minimum pension of EUR 1,200 applies to both new pensioners and retroactively so existing pensioners will benefit. Given that Macron’s legacy will be strongly tied to pension reform, we believe that there is an incentive for the government to compromise. That said, not all MPs from the LR are expected to support the bill even with the requested amendments, hence the 40% possibility that the reform initiative fails.
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