French fiscal woes crimp Macron's defence spending plans

By Leigh Thomas

PARIS (Reuters) - President Emmanuel Macron wants to build up French defence spending as Washington threatens to pull its European security guarantee, but funding those plans as his government struggles to tame an unruly deficit won't be easy.

With one of the biggest budget deficits in the European Union, France is under mounting pressure to rein in overall spending and only passed its 2025 budget last month after weeks of delay in a deeply divided parliament. 

Now, geopolitical headaches resulting from U.S. President Donald Trump's rapprochement with Russia and his temporary freeze on military aid to Ukraine are likely to exert fresh pressure on France's cost-cutting commitments.

"France is heading towards difficult budgetary trade-offs to reconcile the government's commitment to lower budget deficits while increasing defence spending," Scope Ratings agency said in a research note.

France is not alone in its push to put the economy on a war footing.

The parties hoping to form Germany's next government on Tuesday agreed on a major debt overhaul, paving the way for massive spending on defence and infrastructure.

That same day, the European Commission proposed borrowing up to 150 billion euros to lend to EU governments under a rearmament plan. British Prime Minister Keir Starmer has said he would increase defence spending to 2.5% of GDP by 2027 and eventually target 3%.

'GO FASTER AND HARDER'

Macron, who said he would address the nation on Wednesday evening at a "time of great uncertainty," told Le Figaro newspaper this week that European countries needed to push defence spending to "around 3-3.5%", substantially higher than the current 2% target for NATO members.

France is already increasing military spending by 3 billion euros ($3.15 billion) annually until 2030 under a long-term defence planning law, which Armed Forces Minister Sebastien Lecournu has said needs to be revised to reflect the new geopolitical realities.

France complies with NATO's 2% target, but unlike most other members it funds a broader range of defence commitments, from a nuclear arsenal to an aircraft carrier and highly respected home-grown weapons programmes like its Rafale fighter jet. 

However, to lift defence spending to 3% of GDP, France would need to find an extra 30 billion euros per year, according to Reuters calculations.

"We must go faster and harder," Finance Minister Eric Lombard told Franceinfo radio on Tuesday, adding that welfare spending would not be sacrificed to pay the bill.

Nonetheless, Macron has said that tough budget choices are unavoidable, citing the example of the early 1960s when President Charles de Gaulle invested massively to build up France's nuclear arsenal.

"We could have told General De Gaulle regarding the billions spent on nuclear dissuasion 'Why not use it on French purchasing power instead?'," Macron said.

POLITICAL WILL?

With the exception of the far left, most French parties are comfortable with raising defence spending, but there is much less of a consensus on how to pay for it, especially if it requires big cuts elsewhere.

Opposition parties ousted the last prime minister, conservative Michel Barnier, in December when he tried to push through big spending cuts to rein in the deficit under pressure from ratings agencies and rising debt payments.

As Britain hikes defence spending, London is planning to cut its development aid, a move France would find difficult after having already slashed such outlays by more than 30% in the 2025 budget.

While ruling out corporate tax hikes to fund defence, Lombard said the wealthy could contribute more, which should please parties on the left like the Socialists who have called for "fiscal patriotism" to finance defence.

The government also has no wiggle room this year as it seeks to narrow its budget deficit to 5.4% of GDP on the way to the EU's target ceiling of 3% in 2029.

A proposal from the European Commission to carve out defence spending from the EU limit would ease some of the political pressure, although that does little to ease France's growing pile of debt.

"We've got budget constraints," Lombard said. "We've got 3.3 trillion euros in debt, which means each year we pay our lenders more than 50 billion euros, which is about as much as the defence budget."

(Reporting by Leigh Thomas; Additional reporting by John Irish; Editing by Gabriel Stargardter and Hugh Lawson)