France Teeters on the Brink of Economic Crisis
As French lawmakers prepare to cast a no-confidence vote against Prime Minister Michel Barnier’s fragile minority government, economists warn that the impending political stalemate will come at a steep economic cost.
A Government on the Brink of Collapse
Two motions of censure filed by the left-wing and far-right opposition parties will be debated and voted on, likely resulting in the ousting of the administration just three months after its formation. If the government collapses, Barnier will be forced to resign, leaving uncertainty in his wake.
Uncertainty Reigns
President Emmanuel Macron will need to appoint a new prime minister, a task that proved challenging in the wake of the summer election. A caretaker government could drag on for months, with fresh elections unable to be held until next year. Alternatively, Macron’s resignation could trigger presidential elections within 35 days, leaving the budget bill unpassed.
Economic Consequences
French borrowing costs are rising, while the euro is caught up in negative sentiment. Analysts warn that France is facing a growing fiscal deficit that will become increasingly expensive to finance as government bond yields rise. International investors are already wary, with 10-year French bonds commanding a higher premium than those of Greece.
Ratings Agencies Sound the Alarm
Without a budget, France risks defaulting on its debt, despite being able to pay interest. Ratings agencies are issuing warnings, and economists predict that pension funds will dump French bonds in favor of more stable investments. This could send debt spiraling out of control.
Growth Forecasts Slashed
Economists have already trimmed their growth forecasts for France following the publication of the budget proposal in October. The fall of Barnier’s government will only exacerbate the situation, with analysts predicting a provisional budget mirroring the 2024 framework. This will not address the trajectory of public spending, leaving the next government with an even tougher task to rectify public finances.
Domestic Savings to the Rescue?
Some economists suggest that France can count on large reserves of domestic savings to replace international investors. However, this could come at a cost to growth dynamics in the medium term. Consumer confidence has already declined, and the savings rate could rise further, thwarting the rebound in consumption on which the government is counting to support tax receipts in 2025.
A Tale of Two Countries
While both France and Germany are mired in political turmoil, the spread between France’s borrowing costs and those of Germany has stretched to a fresh 12-year high. However, some economists argue that France’s economic prospects are more positive than those of Germany, which faces significant growth challenges in the wake of its reliance on Russian gas and struggling car industry.
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