Another ‘Oh FFS’ Moment For Brussels: Macron ‘Yellow Vest’ Concessions Set Stage For Budget Battle

I don’t think anyone should make too big a deal out of this just yet because we’re still well off the Le Pen levels, but it’s worth noting that the OAT-bund spread is leaking wider on the heels of Emmanuel Macron’s “yellow vest” concessions.

It looks like a block trade that crossed just before 9:00 AM in London pushed this thing out to 48bps, the widest since the elections in 2017 when everyone was panicking about the prospect of a literal Nazi becoming President of France.

(Bloomberg)

The problem, in the simplest possible terms, is that Macron’s decision to placate protesters by funding a minimum wage hike and providing tax relief to pensioners (among other measures) is going to cost money and that, in turn, is set to balloon the deficit to 3.5% of GDP next year.

Amusingly, that means France is set to run afoul of the exact same budget rule that Italy is in violation of. The original reporting on this comes from Les Echos and points to a €11 billion cost associated with the “yellow vest” measures. According to one official who spoke to LE, Macron’s government reckons the measures will slash tax receipts by €4 billion. If growth comes in weaker than expected, the situation will obviously be worse.

So, again, that sets the stage for France to be in violation of EU budget rules, but what I would suggest is that Brussels will be careful about pressing this issue too hard. The EU cannot afford to clash with France at a time when the Italy situation is already taking a heavy toll on sentiment. Additionally, Macron and Merkel have gone out of their way to emphasize solidarity in the face of the still-simmering populist revolt across Europe and just about the last thing Brussels would be inclined to do is undermine that effort by starting a bitter budget fight with France.

Still, this comes at a bad time. It’s the same story over and over again. The ECB is set to wind down asset purchases, which means any upward pressure on [XYZ] spreads to bunds cannot be ameliorated by deliberate deviations from the capital key when it comes to monthly purchases because there won’t be any monthly purchases. This would appear to make the reinvestment plan even more critical than it already was.

In any event, a quick look at a simple chart shows the CAC is actually the “best” (and that’s a relative term among relative terms here) performer in Europe in 2018, so one wonders if that’s sustainable given all of the above.

(Bloomberg)

My gut says France will figure this out and there won’t be a budget battle with Brussels.

Is my “gut” a contrarian indicator? No. Because like Donald Trump, “my gut tells me more sometimes than anybody else’s brain can ever tell me.”