France is on the verge of a political and financial crisis, with Prime Minister Michel Barnier’s minority government under threat of collapse.
An impending vote of no-confidence and contentious budget negotiations have rattled markets, pushing France’s borrowing costs to levels comparable to crisis-hit Greece.
This political distress, combined with France’s rising debt levels, has placed the country’s economic trajectory under the microscope.
What is happening in France’s government?
Prime Minister Michel Barnier faces mounting pressure to pass a 2025 budget aimed at reducing France’s deficit.
The budget proposes €60 billion in tax hikes and spending cuts to bring the deficit from 6% to 5% of GDP next year.
However, opposition parties on both the far-left and far right have resisted these measures, accusing the government of ignoring their priorities.
Marine Le Pen’s far-right National Rally has demanded further concessions.
While Barnier has already dropped a planned electricity tax hike, the National Rally is pushing for pension increases, tougher immigration policies, and the preservation of drug reimbursements.
Le Pen has warned that if these demands are not met, her party will support a no-confidence vote as early as next week.
How does the budget affect France’s borrowing costs?
France’s borrowing costs have risen sharply in recent months.
The yield on French 10-year bonds has climbed to 3%, matching Greece’s borrowing costs for the first time.
This has completely shifted investor perceptions of French creditworthiness. During the eurozone debt crisis in 2012, French yields were 37 percentage points lower than Greece’s.
The gap between French and German 10-year bond yields, a key risk indicator, has widened to 82 basis points, compared to under 50 basis points before President Emmanuel Macron called a snap election in June.
This divergence reflects investor concerns about France’s political instability and its rising debt-to-GDP ratio, currently at 112% and climbing.
Meanwhile, former crisis-stricken countries like Greece, Portugal, and Spain have made significant progress in reducing their debt burdens.
Greece’s debt-to-GDP ratio has fallen from over 200% during the pandemic to around 160% today, with a projected downward trajectory. France, by contrast, faces growing fiscal challenges.
Why is France’s government struggling to govern?
The June-July parliamentary elections left France with a hung parliament, divided into three major blocs: the left-wing New Popular Front, Macron’s centrists, and Le Pen’s National Rally.
None achieved an outright majority.
Macron appointed Barnier as prime minister, relying on the National Rally’s conditional support to pass legislation.
However, Le Pen has increasingly distanced herself from the government. While her party initially offered tacit backing, she has now set several “red lines” that must be met to avoid a no-confidence vote.
These include scrapping proposed cuts to social security and offering more robust policies on crime and migration.
Barnier has warned that a government collapse could lead to financial turmoil.
Finance Minister Antoine Armand echoed these concerns, likening the potential fallout to “a plane stalling at altitude.”
What are the market implications?
The political uncertainty has triggered a sell-off in French assets.
Investors fear that a no-confidence vote could derail fiscal reforms, delaying crucial efforts to reduce the deficit.
French bond yields have risen, and market volatility remains high.
However, some stabilization was seen towards the end of November, with the spread between French and German bond yields narrowing by four basis points, the largest decline since July.
French banking stocks also saw modest gains, with Société Générale and BNP Paribas rising 1.8% and 0.9%, respectively.
Still, analysts warn that this slight recovery does not reverse the broader trend of declining investor confidence.
As Barnier faces a divided parliament and escalating demands from the National Rally, markets remain wary of prolonged instability.
What happens if the government collapses?
If the government falls, France will not face a shutdown like in the United States.
This is thanks to constitutional provisions allowing temporary tax collection and spending by decree.
However, the political uncertainty could delay critical reforms and weaken France’s standing in the eurozone.
Barnier’s administration would continue in a caretaker capacity, but Macron would need to appoint a new prime minister to navigate a fractured parliament.
This process could further erode market confidence and drive up borrowing costs.
The European Union has also expressed concern. France’s fiscal trajectory is closely monitored by the European Commission, which requires member states to keep deficits below 3% of GDP.
Failure to comply with these rules could set a dangerous precedent for the eurozone.
Why does this matter for the eurozone?
France is the second-largest economy in the eurozone, and its fiscal health has significant implications for regional stability.
During the 2012 debt crisis, countries like Greece and Portugal faced severe financial distress, threatening the euro’s viability.
While the European Central Bank intervened then by buying bonds, similar support is no longer guaranteed.
A rise in French borrowing costs could ripple through the eurozone, increasing financing costs for other member states.
Investors may also question the credibility of EU fiscal rules if France, a core economy, continues to exceed deficit limits without consequence.
What’s next for France?
Barnier’s next major test is the Social Security budget vote on Monday, the 2nd of December.
If the government invokes Article 49.3 of the Constitution to bypass parliament, opposition parties are likely to file a no-confidence motion.
Whether Le Pen’s National Rally aligns with the left to topple the government remains to be seen.
As markets watch closely, the stakes are high. A government collapse would deepen France’s fiscal challenges and risk further financial instability.
The unfolding crisis also serves as a reminder of the fragile relationship between politics and economics in the eurozone.
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