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Macron’s pension reform: the French risk ‘covered’ from the markets

Date: March 28, 2024 Time: 23:43:14

The Government of Emmanuel Macron has proposed to review the country’s pension system, one of the largest in Europe. The proposals herald a blackout period, as unions vow strikes to challenge fairness and the need for reform. Despite its importance to the French economy, global investors see little chance that it will provoke a lasting reaction from the markets.

The French government calculates that the reforms will generate 12,000 million euros of new income in 2027 France in 2022.

The plan, presented by Prime Minister Elisabeth Borne on January 10, aims to raise the minimum retirement age from 62 to 64 by the end of the decade. The new proposal would increase the age at which a worker is entitled to a full public pension by three months each year starting in September 2023 and ending in 2030.

The Macron government considers that the French pension system needs a thorough review. The Budget Minister, Gabriel Attal, argued that the reform is not reduced solely to changing the retirement age, but that it is also necessary to increase the value of the lowest state pensions so that they reach the equivalent of 85% of the minimum monthly salary of the country.

“The aging of the population, common to all advanced economies, is exacerbated by a relatively low proportion of people aged 55 to 64 in the French labor market,” says Stéphane Monier, investment director at Lombard Odier. “Only 60% of the population in this age group is employed, compared to 74% in Germany and 67% in the UK. Any increase in the participation rate of this generation, and in pension contributions, would ease the payment burden of younger workers”, he adds.

The reforms also propose expanding the contribution requirement for workers to be entitled to a full state pension from 41.3 to 43 years before 2027, accelerating a 2014 reform under former President François Hollande. In return, the Government proposes to raise the minimum pension to 1,200 euros a month in 2023, compared to the current 950 euros, while maintaining exemptions for some physically demanding professions.

France has, at 62, the lowest legal retirement age in the European Union. However, the “usual” retirement age in France is 63.5 years after a professional career started at age 22, according to data from the Organization for Economic Cooperation and Development (OECD). This figure coincides with the EU average (63.5 years for women and 64.3 for men), compared to 62 years in Italy, 65 in Spain and 65.7 in Germany.

French public debt as a percentage of gross domestic product is the fifth highest in the EU, at 138%, and similar to Spain’s (and the UK’s) 143%. This figure is higher than 90% of the OECD media and 77% of Germany. We expect the country’s economy to grow by 0.3% in 2023, compared to 0.2% in the Eurozone.

direct impact

“Pension reform has become something of a political taboo in France, and efforts to change it have met with historical difficulties,” Monier says. Some polls estimate that up to three-fifths of the population is against raising the retirement age and unions have questioned the government’s calculations and the need for reforms. “They maintain that the 2014 reforms, in force since 2020, will balance the system in 2040 by increasing the retirement contribution of people born after 1972 to 43 years,” adds the expert.

“Although the calculations of the French government’s deficit are based on the long term, we do not see solvency risk in the medium term. Investors remain focused on central banks’ monetary policy and policy makers’ benchmarks are the main driver of the market. If France’s past reform efforts, and the social unrest that accompanied them, are any guide, changes in national pension spending will not affect financial markets.

The spread between French and German 10-year government debt has been relatively stable over the past decade. French sovereign OATs (Obligations Assimilables du Trésor) currently have a premium of about 50 basis points, or 2.55%, to their German counterparts.

“In general, the outlook is difficult for European sovereign debt. Public spending and the gradual reduction of the European Central Bank’s asset purchase program are boosting the supply of sovereign debt, while interest rates will continue to rise in the coming months ”, he comments.

In this environment, in their view, they prefer US Treasuries and investment grade credit. “As for equities, we remain cautious on European companies, even though valuations have fallen below their long-term averages, given further expected earnings cuts. Finally, we see the euro performing stronger recently, as manufacturers’ data stabilize, and amid a mild winter and lower energy prices,” he says.

* This website provides news content gathered from various internet sources. It is crucial to understand that we are not responsible for the accuracy, completeness, or reliability of the information presented Read More

Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.
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