French lawmakers are set to conduct a no-confidence vote in Prime Minister Michel Barnier’s fragile minority government on Wednesday, with economists cautioning about the high economic cost of the ensuing political deadlock. Two motions of censure from the left-wing and far-right opposition parties will be debated and voted on at 4 p.m. local time. The government, formed just three months ago, is widely expected to be ousted due to Barnier’s failure to secure compromise within the divided National Assembly for passing a 2025 budget bill aimed at reducing the French deficit. In the event of a government collapse, Barnier will be compelled to resign to President Emmanuel Macron.
Following Barnier’s resignation, Macron may request him to serve as a caretaker, as the likelihood of Barnier being formally renominated is low due to the absence of a majority, according to Carsten Nickel, deputy director of research at Teneo. This interim period could extend for months, with the possibility of Macron’s resignation triggering presidential elections within 35 days. The caretaker government may propose a special constitutional law to roll over the 2024 accounts without the previously planned spending cuts or tax hikes, allowing the government to continue collecting taxes.
The political uncertainty in France has led to an increase in borrowing costs and negative sentiment towards the euro, exacerbated by poor manufacturing data in the euro area and political volatility in Germany. Analysts have expressed concerns about the growing fiscal deficit in France, which could become more expensive to finance as government bond yields rise amid the ongoing uncertainty. The situation has prompted international investors to view France unfavorably, with warnings from ratings agencies and the potential for a sovereign default without a budget in place.
Economists have revised down their growth forecasts for France following the budget proposal in October, anticipating challenges for the French economy in the absence of a stable government. The fall of Barnier’s government is expected to hinder economic growth and public spending adjustments, impacting France’s ability to meet the European Union’s fiscal rules. The outlook for France’s economy remains uncertain, with concerns about high public deficits, growing debt, and the need for future governments to address fiscal challenges.
Despite the political turmoil in France, some analysts believe that the country’s economic prospects could improve with effective governance and policy measures. While France faces challenges in addressing its fiscal deficit and sustaining economic growth, the situation in Germany presents different economic hurdles related to adapting to new environmental factors and changing business dynamics. The need for political harmony and effective solutions to fiscal sustainability remains crucial for both countries amidst their respective economic challenges.
