President of the Rassemblement National parliamentary group Marine Le Pen (L) speaks to French right-wing Rassemblement National (National Rally) RN party president and MEP Jordan Bardela at a parliamentary seminar for the French right-wing Rassemblement National (National Rally) RN party. French National Assembly in Paris on September 14, 2024.
Ludovic Marin | Afp | Getty Images
France could see a political earthquake in the coming days after the far-right National Rally party gave the government a Monday deadline to accept new concessions in the 2025 budget or face a no-confidence vote it said it would support.
The National Rally (RN), led by Marine Le Pen and Jordan Bardella, has failed to meet most of its budget demands. During negotiations Next year’s budget includes tax increases and spending cuts worth 60 billion euros ($63 billion) with Prime Minister Michel Barnier.
RN said it was likely to support a no-confidence vote if there was no progress on Monday, saying the left-wing New Popular Front (NFP) alliance had already drafted in against Barnier’s minority government since September only.
The left-wing bloc said it plans to table a no-confidence motion if Barnier’s government uses special constitutional powers to force through the budget bill, a move that would overcome opposition from both the left and the right in France’s parliament, the National Assembly.
On Sunday, Le Pen’s government effectively “ended discussions” on the budget, according to French news agency France-Presse, which reported that Barnier now faces the choice of negotiating new concessions or the threat of his government making them. They fall in the vote of confidence.
The RN says the budget will reduce the purchasing power of French people and demand concessions on tax increases, which it says will affect households and businesses. Among its demands, the party is calling on Barnier to raise pensions in line with inflation in January, boost support for small businesses and scrap plans to reduce drug compensation. The Prime Minister has already dropped the planned electricity tax hike.
On Monday, RN President Bardella reiterated that he was likely to support a no-confidence motion against the government in the coming days, barring a “last-minute miracle,” in comments to RTL radio translated by Reuters.
Erlend Robaye | Erroba | Getty Images
If France’s political turmoil comes to a head and the Barnier government is toppled, it is uncertain what will happen next. New parliamentary elections won’t be held until next June, 12 months after the last snap vote called by French President Emmanuel Macron in an ill-conceived move aimed at achieving more political stability, but created rather less.
Money markets are already nervous about France’s unraveling political establishment and what it means for the euro zone’s second-largest economy to tackle its mounting debt pile and budget deficit. It is expected to stand at 6.1% in 2024. French public debt will top 110% of GDP in 2023.
Countries in the EU are obliged to keep their budget deficit within 3% of gross domestic product and their public debt within 60% of GDP. Even before those EU rules came into effect, France was a chronic offender of failing to control its public spending, No government has balanced the budget since 1974.
France’s brewing crisis spilled over into financial markets last week The country’s borrowing costs hit the same level as debt-ridden Greece for the first time on record. Last Thursday.
French Prime Minister Michel Barnier (C) ahead of his general policy statement to the French National Assembly on October 1, 2024 in Paris. Barnier, a right-wing former EU Brexit negotiator, was appointed by the French president three weeks ago to bring some stability. After the political chaos created by a hung parliament as a result of snap elections this summer.
Alain Jocard | Afp | Getty Images
Taken as a whole, France is “on the wrong track,” Berenberg Bank economists led by Holger Schmieding said in an analysis on Monday, warning that “France urgently needs to correct its unsustainable fiscal policy.” “At the mercy of the National Rally.”
Nevertheless, Le Pen will have to play a carefully calculated political game in the coming days, he noted in emailed comments.
“Le Pen may want to appear as a defender of the common man by opposing some of Barnier’s tax increases and spending cuts. But doing so would be dangerous for her,” he said.
“If she now triggers a financial crisis with a rise in bond yields and possibly a French recession, she will be seen as an agent of chaos rather than a responsible leader.” That, in turn, could hurt his chances of winning the presidency in 2027, he noted.
“This calculus suggests that Le Pen may still try to strike a compromise with Barnier, avoiding a political and economic crisis for France this Christmas,” he noted.
Trouble, what happens?
Even if the 2025 budget were to pass by some “last-minute miracle,” to borrow Bardella’s phrase, economists note that it would be a short-term reprieve from France’s wider fiscal challenges.
“If a new and even more minority government comes to terms with the national rally and passes the 2025 budget, that will provide some relief to the markets…However, this will not solve France’s huge budget deficit and government debt problems. Substantive fiscal tightening will be needed to secure a primary surplus,” said Macro of Continuum Economics. Director of Economics and Strategy Mike Gallagher said in a note. Monday.
“With the end of ultra-low interest rates, France’s debt servicing costs are expected to rise above 4% by 2034, triggering a major and persistent debt crisis. However, further multi-year fiscal tightening is unlikely before now. The next parliamentary election from July 2025 and possibly in 2027 The presidential election. France needs a higher risk premium to reflect the fiscal consolidation and Risk of non-residents reducing their huge holdings (53% outstanding loan),” he noted in emailed comments.
People walk along the Chatelet-les-Halls area of Paris during the snowfall of the Catano storm.
SOPA Images | Lightrocket | Getty Images
If the budget fails to pass, European financial markets will see more volatility, Gallagher said.
The spread – the difference in yields between French and German bonds – could mushroom to 150 basis points from its current level of around 80 basis points, and the European Central Bank could potentially be forced to act in some shape or form, he warned. To calm the markets.
Berenberg Bank acknowledged that if the French turmoil significantly dims the euro zone’s growth outlook, the ECB may need to cut rates more than planned to adjust its overall monetary stance.
“However, we consider it unlikely that the ECB will step in directly to support France with bond purchases … The ECB has no business leaving France out of the potential consequences of failing to pass a budget. France must get its act together. Together on its own, perhaps with the center-left and/or Le Pen. are rethinking their opposition to necessary fiscal consolidation,” said Berenberg’s economist.
