Macron’s gamble creates major fiscal headaches for the EU

To argue that Europe has found itself in a moment of the utmost insecurity and unpredictability is an understatement.

While the center broadly held in last month’s European Parliament election, the new right also made gains. French President Emmanuel Macron’s subsequent decision to call a snap election has now plunged his country into a political crisis. And despite the recent approval of a new U.S. aid package, as well as the G7’s commitment to leverage profits from frozen Russian assets to loan Kyiv additional funds, Ukraine’s challenges on the front line remain formidable.

Furthermore, the EU is hugely concerned over former U.S. President Donald Trump’s possible return to office, but is incapable of fashioning any anticipatory policy response.

Amid all this, EU leaders remain adrift, but none of them doubt that geopolitics is back with a vengeance, and that it will inform the bloc’s political and economic priorities over the next five years. Shared by varying degrees in different capitals, the ambition is to make Europe a more serious security actor via a more proactive defense industrial policy, and through political and military support for Ukraine.

Member countries also want the EU to take a more strategic approach toward its neighborhood — from the Western Balkans to Turkey.

But advancing these priorities will all cost money, and that brings political headaches of its own. To put it bluntly, there’s no politically easy way to find the fiscal space to address the challenges the EU faces. And France’s political realities now compound the problem.

Ukraine’s challenges on the front line remain formidable. | Nikoletta Stoyanova/Getty Images

In light of Germany’s constitutional court ruling last November, which stated that the government’s strategy for financing its political priorities was unconstitutional, the country’s ruling coalition has scrambled to cut €20 billion from this year’s budget — a further €30 billion in savings will be required next year.

Meanwhile, in light of crumbling economic forecasts that have forced a reassessment of France’s fiscal trajectory — with a likely budget deficit of 5.1 percent of GDP this year instead of the predicted 4.4 percent — France’s fiscal challenges were already grave. Now, the likeliest outcome of the country’s elections will produce a national assembly that will be ungovernable and incapable of producing a solid alliance to form a government. And if the populist right delivered a majority, the result will be a very radical government that would govern more from the extremes.

Neither of these outcomes would help France’s fiscal outlook — especially after the Excessive Deficit Procedure (EDP) process that the European Commission initiated on June 19 for member countries with deficits above 3 percent of GDP. A hung parliament would likely result in deadlock, with limited ability to pass a budget for 2025.

Additionally, on the basis of the fiscal commitments in their policy program, a National Rally government would actually widen the fiscal deficit. However, the EDP means Brussels is now expecting a fiscal tightening — not just a moderation of the fiscal expansion both the right (and left) intend to undertake.

This is where Macron’s snap election could, in the best case, undermine him in Europe, but in the worst case, prove fatal for what he has long spearheaded.

Macron’s credibility in the EU will depend on France getting its fiscal house in order. But none of the expected outcomes — whether a hung parliament or a far-right majority — will likely be able to deliver the fiscal course correction the Commission will now demand. And this will certainly set off alarm bells in northern Europe.

But there’s an even more direct challenge. While it’s true that as France’s head of state, Macron has responsibility over Europe, foreign affairs and defense policy, and that he would be the one to represent France in the European Council, it is ministers from his government that would represent the country in all of the Council’s formations — be it economic and financial affairs, foreign affairs, Europe, and so on and so forth.

If this were a National Rally government, it would give party leader Marine Le Pen, and her designate as prime minister, the ability to block all of the EU’s political and legislative priorities, regardless of Macron’s stance.

Moreover, any EU initiative that requires parliamentary approval back home would be blocked. This would almost certainly apply to more common financing for the EU’s security and defense agenda — the very thing Macron has been advocating. Moreover, the EU’s ability to negotiate its next budget, which runs from 2028 to 2035, would also require parliamentary approval and could also be called into question.

The fiscal mess at home, and the need for parliamentary approval for any big EU financing initiatives, could run a key part of the next Commission’s mandate into the ground before it has even begun. How ironic it would be if it’s Macron — the champion of a stronger France and stronger EU — whose gamble is responsible for weakening both.