French Prime Minister Michel Barnier thinks during a questions session to the government at the National Assembly in Paris on December 3, 2024.
Julian De Rosa | Afp | Getty Images
The French government stands again Collapsing marginAfter Prime Minister Michel Barnier refused to bow to demands from parties on the right and left to make more concessions on the country’s budget plans.
He now faces a no-confidence vote on Wednesday afternoon, which he is certain to lose.
Meanwhile, the German government is headed for a snap election early next year, with its own no-confidence vote due in the next few weeks.
Even in the UK, where Prime Minister Keir Stormer and Finance Minister Rachel Reeves are under pressure for just five months in the job, controversies have mainly centered on – you guessed it – the budget.
So why are national budgets suddenly so controversial?
In the euro zone, post-pandemic fiscal rules are putting pressure on the most hawkish EU members.
France, Italy and Greece have long been seen as budget rule breakers. However, now Germany, Austria and the Netherlands fall foul of the EU’s deficit rules, which require countries to keep a deficit ratio of 3% of their GDP and a debt ratio of 60%.
The European Commission, the EU’s executive arm, now judges the budget based on its fiscal plans for next year, but that affects the long-term trajectory of each country’s deficit.
In Paris, Barnier’s gamble to push through his 60 billion euros ($63 billion) tax hike and spending cuts by activating Article 49.3 of the French constitution is set to make him the shortest-serving French prime minister since 1958.
Political brinkmanship has dragged French stocks lower Pushing borrowing costs to record highs since the euro zone debt crisis of the last decade.
In Berlin, Chancellor Olaf Scholz made a surprise visit to Kyiv on MondayWith Ukrainian President Volodymyr Zelensky pledged an arms deal worth 650 million euros. The move again raised eyebrows in Germany, as government aid to Ukraine has been at the center of disagreements within the bloc.
The fall of the government could have long-term consequences for Germany’s fiscal rules, with opposition leader Friedrich Merz saying he would consider reviewing once-sacred borrowing rules.
There is more budget-related damage across the English Channel, where the Covid-19 pandemic has plunged business confidence to record lows and manufacturing has slowed sharply. Reeves unveils her tax hike plans.
The ramifications of a perceived “bad budget” seem to be causing political casualties in ways Europe will have to come to terms with for the foreseeable future.
Goldman Sachs made its cut Euro zone growth forecast for 2025 from 1.1% to 0.8%It highlights risks from President-elect Donald Trump’s next term in office, but cites “upward pressure on long-term bond yields from higher deficits” and “negative confidence effects from elevated geopolitical risks”.
Edmund Shing, global chief investment officer at BNP Paribas Wealth Management, highlighted that stagnation and instability are engulfing Europe as the US gains clarity post-election, with Trump set to re-enter the White House next month.
“The lack of political certainty at the heart of Europe comes at the worst possible moment politically,” he told CNBC’s “Squawk Box Europe” earlier this week.
