When Burning Cars in Paris Gets You a Tax Freeze

(Bloomberg Opinion) -- The Macron administration tried playing for time, then it tried talking tough, and now it is trying an olive branch.

On Tuesday, the French government suspended a planned hike in fuel taxes that has triggered weeks of protests from the amorphous “Yellow Jackets” movement. But the increasingly violent protests have already cost President Emmanuel Macron political capital and hurt the economy; it's too soon to say they are over. His future reforms are at risk.

It's clear that Macron and Prime Minister Edouard Philippe have proven better at dealing with organized dissent, like that of trade unions opposed to well-flagged economic reforms, than with the anger of thousands of people fed up with their lot in life.

Macron's early reforms were pushed through efficiently without much noise from the street, but grassroots anger over the rising cost of living – a combination of taxes, commodity prices and temporary budget adjustments – seems to have blindsided both the Elysee and parliament.

The result now is a compromise that will likely please nobody, even if it should ease the level of violence after a weekend that saw Parisian storefronts battered and cars torched. The planned tax increases on diesel and gasoline will be frozen for six months, according Les Echos. It looks like the government is hoping that the recent fall in the price of oil will mitigate the pain.

This retreat from a totemic green policy has come too late to avoid economic damage, arrests and injuries. It's probably too little to represent a lasting political peace.

The bigger story here is France's achingly slow adjustment to new financial realities, from both politicians and the public. There is clearly popular support for change – Macron was given not just a presidential mandate but a majority in parliament – but it's not so easy in practice.

France has the highest level of government spending and second-highest tax take in the OECD, relative to the size of its economy. Its budget deficit is a whisker away from the 3 percent limit imposed on euro zone members, and its public debt pile stands at almost 100 percent of GDP. A sprinkling of handouts would buy Macron some peace, but at huge cost to his credibility, and the public purse.

For now, Macron will probably get the benefit of the doubt from bureaucrats in Brussels and investors holding French debt. The deficit is set to rise next year, but most of the pressures are temporary and should fade as Macron's tax cuts take effect. It is possible that by buying a few months of relative peace, Macron will have some breathing room to focus on his longer-term reforms, according to Deutsche Bank AG economist Marc de Muizon.

The worry must be that when next year's pension reforms start to bite, a similar protest movement could erupt that slows or derails their progress. And there's also the concern that Macron's persistent unpopularity, which he has so far worn as a badge of honor against reactionary forces in France, will become a curse. Like his predecessors Nicolas Sarkozy and Francois Hollande, who both promised to reform the country, there's still a risk Macron will be a one-term president.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering finance and markets. He previously worked at Reuters and Forbes.

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