A pedestrian crosses a flooded street after heavy rain in Paris on October 17, 2024.
Joel Saget | Afp | Getty Images
French lawmakers will hold a no-confidence vote on Wednesday in Prime Minister Michel Barnier’s fragile minority government, as economists warn political instability comes at a high economic cost.
Two “motions of censure” submitted by both the left-wing and right-wing opposition parties will be debated and voted on from 4pm local time. Administration is likely to be widespread Expelled, just three months After it is formed. If the government fell, Barnier – failed to find a compromise in the heavily-divided National Assembly Pass the Budget Bill 2025 Aiming to reduce the huge French deficit – then President Emmanuel Macron will be forced to resign.
From there uncertainty reigns. Macron will eventually have to name a new prime minister after already struggling to make such an appointment in the wake of snap summer elections. More votes for the Left CoalitionBut no party has been given majority. Barnier, the longtime minister, was seen as a technical compromise.
“Once Barnier resigns, Macron will be asked to continue as caretaker. The alternative option of formally renaming Barnier is unlikely given the lack of a majority manifesto,” Carsten Nickel, deputy director of research at Teneo, said in a note on Tuesday.
This caretaker status could drag on for months, since new elections won’t be held until next year, Nickell said, but another possibility is that Macron’s resignation could trigger presidential elections within 35 days.
Such a series of events leaves the budget bill unpassed, making a last-minute deal seem unlikely.
The caretaker government is therefore likely to present a special constitutional law that would “effectively roll over the 2024 accounts without any previously anticipated spending cuts or tax increases, but empower the government to collect taxes,” he said.
Amid the turmoil, French borrowing costs are rising When the Euro gets stuck in negative sentiment – it escalates Poor production data from the euro area and Contemporary political unrest in Germany.
“France faces the prospect of a growing fiscal deficit, which will become more expensive to finance as their (government bond) yields rise amid this uncertainty,” analysts at Maybank said in a note on Wednesday.
The challenge of scarcity
For international investors, the situation in France looks “very bad,” Javier Díaz-Gimenez, professor of economics at Spain’s IESE Business School, told CNBC by phone.
“Without a budget, they will indeed default, because they can’t pay the interest on their debt, but they won’t be without a budget. Rating agencies are already issuing warnings, 10-year French bonds have a high premium. Greece, it’s basically crazy,” he said. Greece briefly lost its investment-grade credit rating status amid the eurozone debt crisis, which led to the nation’s sovereign default.
“But because pension funds don’t care, they want a sure steam of income without any concern about legal shenanigans. So they dump (French bonds) and go somewhere else,” Díaz-Gimenez said.
“Beyond economic growth and stability, it sends debt in an unsustainable direction in France.”
Economists have already trimmed their growth forecasts for France following its announcement Budget proposal In October, it delivered sweeping tax increases and public spending cuts.
Analysts at Dutch bank ING, which previously forecast French growth to fall from 1.1% in 2024 to 0.6% in 2025, said on Tuesday that the fall of Barnier’s government would be “bad news for the French economy”.
He predicted the passage of a provisional budget reflecting the 2024 framework.
“Such a budget does not correct the trajectory of public spending,” he said, dismissing Barnier’s target of reducing the public deficit from 6% of GDP to 5% in 2025 – which means France will not move towards the meeting. The European Union’s new fiscal rules.
“At a time when economic growth is slowing significantly in France, this is bad news. Public deficits will remain high, debt will continue to grow and the next government – whenever that is – will have an even tougher job of putting public finances in place. Well,” the ING analyst said.
Gilles Moeck, group chief economist at AXA, said in a note on Monday that “France may count on large reserves of domestic savings to replace international investors, and dataflow from the euro area will help decouple the European from US yields, but direct at moderate levels. High domestic savings may be costly to fund the government relative to growth dynamics.”
“Consumer confidence has already fallen, and the savings rate could rise further, preventing a rebound in consumption that the government expects to support tax receipts in 2025,” Moeck said.
German comparison
The spread between France’s borrowing costs over Germany’s widened to a 12-year high this month, with both countries mired in their own political turmoil.
However, IESE Business School’s Díaz-Giménez said that in some ways, the French outlook is more positive than that of the euro area’s largest economy.
“In France, the economic future is quite bleak, but it will not be a disaster if complementary risks can be avoided. Fixing the high fiscal deficit is difficult and political harmony is needed but they can still find a way, which will create pressure. Politicians need to do their job and solve the real problems, in this case fiscal sustainability, ” he told CNBC.
“But the problem in Germany is growth. The German economy needs a major adaptation to a new environment without Russian gas, and making cars in Europe looks like a really bad business plan. From an economic point of view, it’s hard to solve. The French problem.”
