A mere three months. That is how long the government of centre-right politician Michel Barnier has lasted in France. Barnier came to power following French President Emmanuel Macron’s decision to call early parliamentary elections. In a sense, he had little choice, as his party lacked a majority in the French Parliament.
Those elections took place in June, however, and weakened Macron’s party. After a lot of negotiating, former Brexit negotiator Michel Barnier was finally put in the saddle, as his government was effectively tolerated by Marine Le Pen’s Rassemblement National, who therefore was controlling the balance of power, something once unthinkable.
Macron and Barnier’s hope was that Le Pen would tolerate the government for some time anyway. That turned out to be vain hope. Earlier this month, Le Pen supported a vote of no confidence tabled by the left-wing opposition. The vote came after the French government announced it would invoke constitutional article 49.3 to pass the budget outside parliament. This sealed the government’s fate.
Le Pen’s motive remains a mystery. Does she hope in this way to weaken Macron so much that he sees no other way out than to call an early presidential election – normally scheduled for 2027? Does she fear the court case over the illegal employment of European Parliament assistants by her own political party? The French public prosecutor recently demanded that if those facts are proven, Le Pen should be banned from standing for election for five years. Such a punishment could ‘disrupt the French democratic system’, warned François Bayrou, a leading French politician who has always been ideologically in the centre but is not a member of Macron’s party. He stands a good chance of succeeding Barnier as Prime Minister.
The hope is that Bayrou enjoys the trust of Le Pen. In any case, early parliamentary elections cannot be called again until June 2025, and Macron refuses to step down early as President. Moreover, in case no political agreement is found, the French Constitution is not clear about the powers of a French government that lacking majority support in Parliament. Even on a kind of ‘provisional twelfths’ budget, where the French government can continue to spend money subject to all sorts of restrictions, there is legal uncertainty.
It is all especially worrying given the state of French public finances. The French people are simply refusing to accept the spending cuts and tax increases that Barnier wanted to push through in order to get the French budget – in deficit since 1974 – back into order somewhat. Of course, within the Eurozone system, there is the European Central Bank, which bails out profligate welfare states like France with clockwork regularity, on the back of European savers, but if the ECB goes too far in this, it rightly causes political tensions with other eurozone member states, not least with Germany, equally politically unstable as it will hold early elections in February.
On top of that, an important negotiation is taking place at European level on the trade agreement between the European Union and the Latin American trade bloc Mercosur. Indeed, just as a major political crisis broke out in France, European Commission president Ursula von der Leyen travelled to Uruguay, where she agreed to the Mercosur deal, after no less than 25 years of negotiations between the two trading blocs.
Mercosur’s approval pours oil into the fire
In all likelihood, the European Commission will split off the trade aspects of the Mercosur deal from the more political aspects, making national parliamentary ratification unnecessary for the trade aspects to come into force at least provisionally. Yet even then, EU member states would still have to give their agreement within the EU Council, on top of European Parliament approval. It remains to be seen whether France will find a blocking minority there. France would have managed to get Poland and Austria behind it, and in the Netherlands, a parliamentary majority is opposed, but crucial will be the position of Giorgia Meloni’s Italian government. Her government ministers already expressed conflicting views on Mercosur.
Arguments that French companies also have much to gain from fewer trade barriers and that the agreement with Mercosur is the biggest trade deal ever concluded by the EU are increasingly falling on deaf ears. The economic downturn Europe is facing – mainly self-inflicted – is accompanied by increased support for protectionism, something that is also on the rise in the United States, with the election of Trump.
The European Union owes it to itself that Mercosur was not finalised earlier. A few years ago, it suddenly came up with new demands to impose all kinds of environmental standards on Latin American trading partners. These did of course not consider this to be acceptable. On top of that, the new European deforestation directive, whereby Europe imposes hefty bureaucratic standards on timber importers, soured relations with trading partners.
Initially, major exporters of palm oil, Malaysia and Indonesia, were angry about this. They found it unfair that the EU refuses to recognise their local deforestation standards, despite NGOs praising them for decreasing deforestation just last year. Especially since the UK does recognise these local standards. Afterwards, Brazil and also the US joined the protest. It led to a one-year postponement of the deforestation directive, but the legislation is still not off the table. Furthermore, Mercosur foresees“better treatment” for Mercosur countries when it comes to assessing their compliance with the EU’s new deforestation rules, which means that non-Mercosur members that perform well on environmental indicators may be disadvantaged. Despite Malaysia’s “carbon sequestration” in the palm oil industry or tree planting programmes – stimulated by the Malaysian Palm Oil Green Conservation Foundation (MPOGCF) – it would therefore be disadvantaged in comparison with the likes of Brazil, which have not been as successful to combat deforestation. It all shows how tricky it is to politicise trade deals..
On top of that, there is also the new European climate tariff Carbon Border Adjustment Mechanism or CBAM, where the EU will start penalising imports from trading partners with additional customs tariffs for refusing to follow the same climate policy as the European one. India is very angry about this, but there are also concerns in the UK. There are even thoughts of introducing a UK CBAM equivalent, but according to a study by the UK Growth Commission, ‘this could lead to a loss of GDP per capita of around £150 to £300.’
An alternative climate policy, according to think tanks such as the Warsaw Enterprise Institute, could be to replace the collectivist Paris Agreement with a ‘Climate & Freedom Agreement’. Signatories to this treaty would benefit from trade benefits if they implement climate-friendly free-market policies, for example by ‘tax changes … to make investment in PP&E (Property, Plant, and Equipment) more profitable in a way that encourages companies not only to maintain their current capacities, but also to modernise and develop new projects.’ The agreement also includes a recommendation to ‘eliminate all types of subsidies in an orderly and gradual manner’. Meanwhile, new US President Trump already wants to pull out of the Paris Agreement again, so soon, the European Union should start to fundamentally rethink its own protectionist climate policies.
Another reason to rethink those is that they are at the heart of the EU’s competitiveness problem. Only recently, Thyssenkrupp announced it will be reviewing its plans to produce green steel, referring to high energy prices as one of the reasons. The natural gas price in Europe is estimated to be 5 times the level of the US gas price, which mostly is the consequence of the EU’s climate tax ETS and the European ban on exploration of shale gas, which it nevertheless happily imports at high prices from the U.S.
In itself, innovation to make steel production more environmentally friendly is of course very welcome, but in order for Europe to succeed here, it must not only end the experiments with its energy supply but also keep close ties with the United States. Otherwise, it may become too dependent on Chinese supplies.
Also the United states must however care about this security aspect of steel production. U.S. President Joe Biden has been contemplating to block the takeover by Japan’s Nippon Steel of U.S. Steel. This decision should be questioned. While it is one thing to block heavily subsidized Chinese companies from distorting competition in Western markets – currently also a concern in Europe – it is quite another to apply this to a Japanese takeover. Japan is a solid Western ally. The proposed merger creates one of the world’s biggest steel companies outside of China. Blocking this merger may actually weaken the West and its allies economically when having to compete with China. That’s a key reason why Trump, who may need to decide on this, should allow the merger.
The spectre of protectionism
It is clear that those who constantly try to abuse trade negotiations to push through their own political agenda eventually undermine public support for trade agreements. Public opinion then rightly sees such negotiations as a tangle of private business interests, where the focus is not on simply removing trade barriers, but rather on imposing all kinds of regulatory standards tailored to big exporters. Certainly in France, this is one of the reasons why free trade is not associated with more choice and lower prices for consumers or more opportunities for French companies to offer their products and services to more people.
Truth be told, public opinion is partly right, because major trade agreements like the Mercosur-EU agreement do not involve real ‘free trade’ but rather ‘managed trade’. Although it still involves trade liberalisation, in net terms.
In any case, the conclusion of the Mercosur – agreement creates even more turmoil in French politics. Sophie Primas, France’s trade minister, warned that ‘this is not the end of the story. (…) This only binds the Commission, not the [EU] member states.’ Her colleague Annie Genevard, the French agriculture minister, stated: ‘This agreement in no way guarantees the reciprocity of standards imposed on our own producers.’
One does not have to be a political genius to see that all this will all cause Le Pen to lash out even more against the EU, but also the French left will gain from this. Macron could perfectly well appoint a new Prime Minister every six months, and have another parliamentary election in June, hoping this will favour his party. However, a new defeat could put a lot of pressure on French President Macron to resign and call new Presidential elections, according to observers. At some point, the pressure will become too high.
