France is facing a major political crisis that is threatening its economic stability. On Wednesday, French lawmakers will hold a no-confidence vote in the fragile minority government of Prime Minister Michel Barnier. The outcome is widely anticipated to result in the collapse of the administration, only three months after its formation. With Barnier struggling to find consensus within the deeply divided National Assembly on a critical budget bill, a political stalemate now looms large, one that economists warn could severely undermine France’s economic growth.
The motion of no-confidence, filed by both left-wing and far-right opposition parties, will be debated and voted upon at 4 p.m. local time. If the government falls, Barnier will be forced to tender his resignation to President Emmanuel Macron. This will set the stage for further uncertainty. Macron will need to name a new prime minister, though his previous attempt to appoint Barnier as a compromise candidate failed to yield results due to a lack of parliamentary majority. Barnier, a long-serving technocrat, is seen as a pragmatic option, but this political crisis undermines his capacity to govern effectively.
In the event of a resignation, Barnier may be asked to serve in a caretaker role. According to Carsten Nickel, deputy director of research at Teneo, this caretaker period could last several months since fresh elections cannot be called until next year. This scenario could also lead to a political vacuum, potentially triggering presidential elections within 35 days, adding another layer of instability to the situation.
The political deadlock has already had economic consequences. Borrowing costs in France have risen, while the euro has come under pressure, particularly following weak manufacturing data across the eurozone. Analysts at Maybank noted that France is now facing the prospect of a growing fiscal deficit, which will become more expensive to finance as government bond yields rise amid political uncertainty. This financial instability casts doubt on France’s ability to manage its economic challenges effectively.
International investors have also begun to express concern over France’s economic outlook. Javier Díaz-Giménez, an economics professor at Spain’s IESE Business School, commented that France is now in a precarious position, with its debt rating at risk. He noted that France’s 10-year government bonds now carry a higher premium than those of Greece, a country that briefly lost its investment-grade status during the eurozone debt crisis. The risk of a default, he argued, is not due to France’s inability to pay interest on its debt, but rather because the country is unlikely to pass a budget. This uncertainty is expected to drive investors away from French bonds, further compounding the economic crisis.
With France’s growth forecasts already revised downward, economists warn that the political turmoil will worsen the country’s fiscal position. ING analysts, who previously forecast French growth to slow from 1.1% in 2024 to 0.6% in 2025, warned that the fall of Barnier’s government would exacerbate the situation. They predict that the passing of a provisional budget, which mirrors the existing 2024 budget framework, will not address the trajectory of public spending. This failure to tackle fiscal challenges will prevent France from meeting the European Union’s new fiscal rules, thereby further delaying any meaningful improvement in public finances.
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Gilles Moëc, group chief economist at AXA, also expressed concern, highlighting that although France can rely on domestic savings to replace international investment, this approach could hurt the country’s growth prospects in the long run. Domestic savings could become costly to manage, especially if consumer confidence continues to decline, further hindering economic recovery.
In contrast, the political and economic problems facing Germany are more centred on growth rather than fiscal stability. While both France and Germany are grappling with significant political challenges, analysts believe that the French economy may fare slightly better than Germany’s in the short term, provided the ancillary risks can be managed. Nonetheless, the high fiscal deficit in France remains a pressing issue that requires political cohesion, a prospect that appears increasingly uncertain.
In summary, the political crisis in France is casting a long shadow over the nation’s economic future. With the budget bill stalled, borrowing costs rising, and investor confidence waning, France faces an uphill battle to stabilise its fiscal position. Whether the government will find a way to resolve this political turmoil or if the economic situation will worsen remains to be seen.
