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France’s Left Takes Charge: What’s Next for the Economy?

Daniel Kim Views  

Yonhap News

On July 8, the international credit rating agency Standard & Poor’s (S&P) 500 pointed out that the new parliament’s decision-making over the next few months will complicate France’s economic and fiscal policy, increasing uncertainty. They warned that if France fails to reduce its massive public deficit and the burden of interest on debt surges, or if the growth rate significantly underperforms forecasts for a long period, the country’s credit rating will be pressured. S&P had already downgraded France’s long-term sovereign credit rating from AA to AA- at the end of May. This was the first time S&P had downgraded France’s credit rating in 11 years since 2013. Now, S&P has again raised the possibility of a further downgrade.

Concerns are rising over the economic crisis in countries like Mexico and France, where left-wing parties have taken the lead. This is due to the judgment that left-leaning policies may increase fiscal burdens and dampen economic vitality. The French Industrial Association pointed out in a statement, “The new government formed after this election cannot ignore the worrying situation of slowing growth, increasing corporate bankruptcies, frozen investment and employment, and deteriorating public finances.”

Initially, the far-right National Rally (RN) was expected to win in the final vote of the French parliamentary runoff elections, but the left-wing alliance New People’s Front (NFP) pulled off a surprise victory. The NFP promised to increase the minimum wage, lower the pension age, and reintroduce the wealth tax, all of which are in stark contrast to the economic reforms that President Emmanuel Macron has been pushing for.

The problem is that France’s conditions are not favorable. Last year, the size of France’s fiscal deficit reached 5.5% of GDP. The yield on French 10-year government bonds, which started the year at 2.538%, rose to 3.221% on July 8, the day after the final vote. This indicates that bond yields are rising due to the potential expansion of fiscal burdens.

Similar concerns are being raised about the economies of the U.K. and Mexico, where left-wing governments have taken power. The Labour Party, which ousted the Conservative Party and returned to power for the first time in 14 years, promised to build 1.5 million houses within five years and strengthen the National Health Service during the election campaign. As they have pledged not to raise income tax or corporate tax, the national debt is expected to increase. Isabel Stockton, a senior research economist at the U.K. think tank Institute for Fiscal Studies (IFS), pointed out, “If Labour’s policies are realized, growth will be disappointing and debt interest will be high.”

In Mexico, where the first female president in the country’s constitutional history was elected, the ruling left-wing party’s announcement of various social reform policies has led to significant volatility in the peso’s value, increasing economic uncertainty. Jun Kwang Woo, Chairman of the World Economic Research Institute, expressed concern, by saying, “When looking at Mexico’s situation, I think it resembles Korea where the opposition party holds nearly two-thirds of the seats.”

Experts agree that this situation is not just someone else’s problem. As of the end of May, the national tax revenue was $7.6 billion short compared to the previous year, while the opposition Democratic Party has proposed a $190 per person national livelihood support card. There are even claims to ease the requirements for additional budget adjustments specified in the law. Cho Dong Geun, a professor of economics at Myongji University, said, “Preventing the degradation of currency is the most important economic policy,” adding, “If you pay support funds and increase subsidies, liquidity will increase and the value of the currency will eventually decrease.” He emphasized that “unless it’s urgent, fiscal expenditure should be strictly limited.”

Korea’s national debt is expected to increase for a while. This is because mandatory expenditures are greatly increasing as social welfare systems such as the national pension and long-term care insurance mature and the proportion of the elderly population increases. According to the 2024 Fiscal Outlook Report published by the International Monetary Fund (IMF) in April, Korea’s national debt ratio, which is 56.6% this year, is expected to approach 60% by 2029.

Daniel Kim
content@viewusglobal.com

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