A pedestrian walks through a flooded street after heavy rain in Paris on October 17, 2024.
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French lawmakers are set to hold a vote of no confidence in Prime Minister Michel Barnier’s fragile minority government on Wednesday, with economists warning that the ensuing political deadlock will be costly economically.
Two so-called “censure motions” proposed by left-wing and far-right opposition parties will be debated and voted on starting at 4 p.m. local time. It is widely believed that the current government is likely to be ousted just three months after it was formed. If the government collapses, Barnier will be forced to submit his resignation to President Macron. annual budget bill.
Since then, uncertainty has reigned supreme. Macron will eventually need to appoint a new prime minister, having already struggled to make such an appointment after snap elections in the summer that gave the left-wing coalition the most votes but gave no party a majority. Barnier, a long-time minister, is seen as a technocratic compromiser.
“Once Barnier resigns, Macron is likely to ask him to continue as caretaker,” Carsten Nickel, deputy director of research at Teneo, said in a report on Tuesday. “Given the apparent lack of a majority, an alternative to formally renominating Barnier seems unlikely.” Too likely.
Nicol said the caretaker status could last for months as new elections are not due until next year, while another possibility is Macron’s resignation, triggering a presidential election within 35 days.
He added that such a series of events would make it impossible to pass the budget bill and a last-minute deal seemed unlikely.
The caretaker government is therefore likely to propose a special constitution that would “effectively roll over the 2024 accounts without any of the previously envisaged spending cuts or tax increases, while authorizing the government to continue collecting taxes,” he said.
France’s borrowing costs are rising amid the turmoil, while the euro is mired in negative sentiment – fueled by bleak euro zone manufacturing data and concurrent political turmoil in Germany.
“France faces the prospect of a widening fiscal deficit, and as (government bond) yields rise amid this uncertainty, financing costs will become higher,” analysts at Maybank said in a note on Wednesday.
deficit challenge
Javier Díaz-Giménez, an economics professor at Spain’s IESE business school, told CNBC by phone that the situation in France looks “very bad” for international investors.
“Without a budget, they really will default, not because they can’t pay the interest on their debt, but because without a budget they won’t default. Ratings agencies have warned that premiums on 10-year French bonds are higher than the fundamentals of French bonds in Greece.” It’s crazy,” he said. During the eurozone debt crisis, Greece briefly lost its investment-grade credit rating, leading to the country’s sovereign default.
“But that’s because pension funds don’t care, they just want a guaranteed stream of income without fear of legal shenanigans. So they’ll sell (French bonds) and look elsewhere,” Díaz-Gimenez explain.
“In addition to economic growth and stability, this will lead to an unsustainable direction in French debt.”
Economists have already cut their growth forecasts for France following the release of the economic report. October’s budget proposals come amid sweeping tax increases and public spending cuts.
Analysts at Dutch bank ING, who had previously forecast France’s economic growth to slow from 1.1% in 2024 to 0.6% in 2025, said on Tuesday that the resignation of Barnier’s government “will be bad news for the French economy.”
They also forecast the adoption of an interim budget reflecting the 2024 framework.
“Such a budget will not correct the trajectory of public spending,” they said. They abandoned Barnier’s target to reduce the public deficit from 6% of GDP to 5% by 2025, meaning France would not move towards to meet the EU’s new goals.
“This is bad news at a time when France’s economic growth is clearly slowing. The public deficit will remain high, debt will continue to grow, and the next government – whenever that is – will have an even harder task of reshaping public finances. Yes,” ING analysts said.
Gilles Moëc, chief economist at AXA Group, said in a report on Monday that “France can rely on its large domestic savings reserves to displace international investors, and euro zone data flows help European and U.S. earnings.” rate decoupling, but in the medium term too much domestic saving to fund the government could become costly in terms of growth momentum.
“Consumer confidence has declined and savings rates are likely to rise further, hampering the rebound in consumption that the government is counting on to support tax revenues in 2025,” Moëc said.
Germany comparison
The spread between France’s borrowing costs and Germany’s borrowing costs hit a 12-year high this month, even as both countries are mired in political turmoil.
However, Díaz-Giménez of IESE Business School said that in some respects France’s prospects were more optimistic than those of the euro zone’s largest economy.
“In France, the economic outlook is quite bleak, but if collateral risks can be avoided, it will not be a disaster. High fiscal deficits are difficult to solve and require political harmony, but they can still find a way out, which only puts pressure on politicians To do their job and solve the real problem, which in this case is fiscal sustainability,” he told CNBC.
“But in Germany, the problem is growth. The German economy needs to adapt significantly to a new environment without Russian gas, and building cars in Europe looks like a very bad business plan. From an economic perspective, the problem is harder to solve than the French problem .
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