(Bloomberg) — French Prime Minister Francois Bayrou appears to have bought himself at least a few months in power by offering to renegotiate a contested 2023 pension law, securing the tacit backing of enough lawmakers to adopt an urgently needed budget.
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The premier said labor and business unions will be tasked with negotiating changes that could include halting the planned increase in the minimum retirement age to 64 from 62.
Any potential modifications must not worsen the financial balance of the vast public system, Bayrou added, noting that the current plan will remain in place should three months of talks fail.
Bayrou’s olive branch on pension reform appeased the Socialists who said they would be open to negotiations with labor unions, effectively granting his government the time needed to pass the budget.
“We trust in social dialogue, and no one should be ashamed to go back to meeting our social partners,” said Socialist lawmaker Boris Vallaud after the speech. “We have one objective alone: serving the country and being useful.”
The concessions offered by Bayrou confirm his effort to strike a deal with moderates in the leftist New Popular Front alliance in the National Assembly that would ensure their abstention in no-confidence votes. Similar attempts by Michel Barnier to reach an understanding with Marine Le Pen’s far right backfired.
“The first emergency is to respond to the question of pensions that is dominating public debate,” Bayrou said in a policy speech at the National Assembly. “We can look for a path for new reform, with no totems and no taboos.”
Lawmakers from the hard-left France Unbowed said they would propose a no-confidence motion after the prime minister spoke at the National Assembly.
That censure vote, which will be held Thursday, has little chance of passing as National Rally vice-president Sebastien Chenu said far-right lawmakers would not back the left on this occasion. But there will likely be more of the ballots in coming weeks and months, making it crucial for Bayrou to keep the Socialists in his corner.
Socialist leader Olivier Faure said late Tuesday that his party still needed guarantees on what would happen at the end of the three-month negotiating period and that it couldn’t accept an automatic return to the current law.
Bayrou was appointed last month after his predecessor, Barnier, was toppled when opposition parties from the left — including the Socialists — and the far-right joined forces in a no-confidence vote over the 2025 budget. France is currently operating under an emergency budget law to avoid a governmental shutdown.
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During the nearly 90-minute speech, Bayrou also gave more details on how he plans to adopt a 2025 budget to urgently rein in gaping deficits. The previous fiscal plan was rejected with the collapse Barnier’s government when he tried to push €60 billion ($61.2 billion) in tax increases and spending cuts through parliament to bring the deficit down to 5% of economic output from around 6.1% in 2024.
Bayrou set out a less ambitious target of a gap at 5.4% this year, based on “significant savings.” But the new French premier said businesses should not face “exponential” tax increases, and pledged a “notable” increase in healthcare spending.
The premier also confirmed the government is working on a levy to counter tax optimization by the richest individuals.
He reduced the economic growth forecast for this year to 0.9% from 1.1% as activity is faltering amid the prolonged uncertainty.
France’s 10-year yield premium over Germany, a widely watched measure of risk, was around 82 basis points late Tuesday, below the recent peak of about 90 basis points.
Still, the spread remains elevated above 80 basis points, roughly twice where it was before Macron called snap elections last year as investors demand higher compensation to hold French bonds.
Bayrou’s economic proposals will test the leniency of the European Union in the application of new fiscal rules that are designed to bring deficits back below the limit of 3% of economic output. Part of the European Commission’s assessment of compliance is based on a country’s efforts to undertake structural overhauls of its economy, including by changes to pension systems.
The new approach to the budget and economic policy will also be closely watched by investors, who have dumped French assets amid the political instability and fiscal uncertainty of recent months.
“We must pull ourselves together and adopt without delay the budgets for the state and the social security system,” Bayrou said. “We are all paying a high price for this budgetary uncertainty: businesses, investors, families, taxpayers and borrowers.”
Bayrou’s tacit truce with Socialists provides reassurance that France will likely have a budget. But if the budget efforts are judged too meager, doubts will persist among investors over whether rising public debt can be curtailed.
Potential changes to the pension system are a significant part of the calculation. According to the government, the cost of abolishing reforms including Macron’s increase of the minimum retirement age to 64 from 62 could be around €3 billion next year and almost €15 billion in 2030.
Bloomberg Economics estimates that halting the reform could create a 1.2% hit to GDP by 2050 and lift the debt ratio by almost 15 percentage points.
The 2023 pension law sparked mass nationwide protests, and left Macron and his party deeply unpopular with French voters, overshadowing his second five-year term. Macron’s centrist party was subsequently hit by heavy losses in last summer’s European elections as well as the legislative vote.
But undoing the reform would mark an emblematic reversal of a centerpiece of Macron’s pro-business legacy that he says is vital to boosting employment and halting the build-up of deficits in France’s vast social security system.
Bayrou is also walking a political tightrope with concessions because pleasing the center-left could come at the cost of support from a small group of center-right lawmakers who have refused tax increases or the suspension of the application of Macron’s pension reform.
While Bayrou’s government may have survived its first test in parliament, the tentative backing of the Socialists may not last if the three months of talks do not deliver the changes the party demands.
“Our goal remains the repeal of the reform that set the pension age at 64, and we cannot be satisfied if there is no agreement,” Vallaud said.
(Adds comments from Socialists’ Faure in 10th paragraph.)
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