A demonstrator weaning a Tweety Pie costume marches alongside those wearing yellow vests (Gilets jaunes) during a protest against fuel costs near Rodez, France. (Photographer: Balint Porneczi/Bloomberg)

Why Macron Gave In to the Yellow Vests

(Bloomberg Businessweek) -- Emmanuel Macron thought voters wanted a leader who remained above the fray—“to preside, not govern,” as he put it during his 2017 campaign. Now, after three weeks of nationwide demonstrations and violent clashes in the heart of Paris, the 40-year-old French president has been swept up in the fray, and he risks losing his ability to deliver the economic and political renewal he promised.

On Dec. 4, Macron suspended a planned fuel tax hike that sparked the Gilets Jaunes, or Yellow Vests, movement, named for the safety vests French drivers must keep in their cars. The concession didn’t appease protesters, whose list of grievances extends much further. “The French won’t be satisfied with just crumbs, they want the whole baguette,” said Benjamin Cauchy, an early movement organizer, speaking to BFM TV, a 24-hour news channel.

Among other things, demonstrators demand an increase in the minimum wage, higher taxes on multinational companies and the wealthy, and a rollback in existing energy taxes. Macron is sure to refuse to take those steps, which would demolish his efforts to keep budget deficits below the European Union’s 3 percent limit and fly against the fiscal rectitude he’s promised financial markets. France is already skating close to the EU limit; the government must find an extra €2 billion ($2.3 billion) next year to compensate for the tax it’s now suspended.

Why Macron Gave In to the Yellow Vests

The protests could also derail Macron’s push for more difficult reforms, including revamping the state pension and unemployment insurance programs next year. Perhaps most ominous for him, the turmoil could undercut his centrist political movement and fuel rising populism and nationalism, which he considers dangerous. Polls show that almost three-fourths of the country supports the Yellow Vests; Macron’s popularity has plunged as low as 23 percent in recent days.

So far, he’s stuck with his more distant style, leaving Prime Minister Edouard Philippe to announce the tax’s suspension and Finance Minister Bruno Le Maire to reassure leaders in Brussels on Dec. 4 that France would “respect our European commitments, reduce spending, reduce debt, and reduce taxes.” That’s reinforced the impression Macron is out of touch with ordinary people, following gaffes such as telling an unemployed gardener there were plenty of jobs if he would “cross the road” to look for them.

The president “is walking a tightrope,” says Philippe Waechter, chief economist at Ostrum Asset Management in Paris. “He thought that once he was elected, he wouldn’t have to convince people” to support his program. During Macron’s first months in office, voters seemed on board as he rewrote the famously restrictive French labor code to make it easier for employers to hire and fire workers, a move that required standing firm against labor unions. To stimulate investment, he cut taxes on businesses and capital, scaling back a law introduced under Socialist President François Mitterrand that taxed the assets of wealthy households. (The tax now applies only to real estate they own.) He also introduced tax breaks for lower- and middle-income households that the government contends should ease the pain of higher fuel taxes.

Those measures haven’t provided the growth he was hoping for. After expanding 2.3 percent in 2017, the economy is expected to grow only 1.6 percent this year and in 2019. Unemployment is down from 10.1 percent in 2016, but it’s still an uncomfortably high 9 percent. Inequality in household wealth has widened, and the French tax burden remains the second-highest in the developed world, after Denmark’s, with tax collections equaling almost 45 percent of gross domestic product.

The Yellow Vests took root outside Paris, in rural areas where people rely on cars because there’s no public transportation. Nationwide, 70 percent of adults drive to their job. What’s more, budget cutting in recent years has curtailed public services, forcing many to travel farther to reach schools, hospitals, and government offices. “There’s anger, because people see higher [fuel] taxes but they aren’t yet feeling the advantages” from tax breaks, says Jacky Roy, mayor of Vouvant, a village in the west-central Vendée region. Roy says he supported Macron’s candidacy but understands public frustration: “People with lower salaries can no longer live comfortably. We are waiting impatiently to see results.”

France has a long history of bitter protests, but it’s never seen anything quite like the Yellow Vests. The movement spread mainly over social media and has no designated leaders, leaving the government scrambling to find a negotiating partner. When Philippe invited eight unofficial representatives to a Nov. 30 meeting, only two showed up—and one walked out after the prime minister refused to broadcast the meeting live on TV.

Macron asked unions and civic associations to help resolve the crisis, but while some members of those groups have joined the protests, their national leaders have stayed on the sidelines. Far-right leader Marine Le Pen, whom Macron defeated in 2017, went on TV during the rioting in Paris on Dec. 1 to say, “All this violence is the fault of the government refusing to listen.” Still, it’s unlikely the Yellow Vests will ally with any prominent politician. “This is a movement that holds all institutions and the establishment in disdain,” says Sylvain Boulouque, an historian who studies radical political movements.

The Yellow Vests’ anger may force Macron to delay some long-planned reforms in favor of crowd pleasers, such as emergency tax cuts for the middle class. That would be tricky: Lower taxes would reduce revenue, so Macron would have to trim spending to stay within the 3 percent EU deficit limit. And spending cuts could slow economic growth.

Macron may be ready to take that gamble. Le Maire had already suggested as much on Dec. 3 when he told reporters in Brussels, “If we need to cut spending faster to be able to cut taxes faster for households and businesses, I’m ready to commit to that course.” —With Gregory Viscusi, Helene Fouquet, and William Horobin

To contact the editor responsible for this story: Jillian Goodman at jgoodman74@bloomberg.net

©2018 Bloomberg L.P.