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Marine Le Pen (L), president of the national parliamentary group Rassemblement, speaks with the president and leading MEP of France’s far-right Rassemblement National (National Rally) RN party, Jordan Bardell, at a parliamentary seminar of France’s far-right Rassemblement National (National Rally) RN party. French National Assembly in Paris on September 14, 2024.
Ludovics Marins | Afp | Getty Images
France could be in for a political earthquake in the coming days after the far-right National Rally party gave the government until Monday to negotiate new concessions on the 2025 budget or face a no-confidence vote it has said it will support.
The National Rally (RN), led by Marine Le Pen and Jordan Bardel, has so far failed to meet most of its budget demands. during negotiations with Prime Minister Michel Barnier on next year’s budget, which includes tax increases and spending cuts worth 60 billion euros ($63 billion).
The RN has said that if there is no breakthrough on Monday, it is very likely to support a no-confidence vote, which the leftist New People’s Front (NFP) alliance said it had already drafted against the minority government that Barnier has led since September.
The left-wing bloc said it plans to table a no-confidence motion if Barnier’s government uses special constitutional powers to push through the budget bill, which would mean he would defeat both left- and right-wing opposition in the National Assembly, France’s parliament.
On Sunday, Le Pen said the government had effectively “put an end to discussions” on the budget, according to French news agency Agence France-Presse, which reported that Barnier was now faced with the choice of negotiating new concessions or threatening that his government would. a drop in the confidence vote.
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The RN says the budget reduces the purchasing power of French people and wants to make concessions on tax increases it says will hit households and businesses. Among its demands, the party calls on Barnier to increase pensions in line with inflation in January and increase support for smaller businesses. The prime minister has already abandoned a planned increase in electricity tax and on Monday abandoned plans to reduce the cost of medicines.
On Monday, RN President Bardella reiterated that the party was likely to support a motion of no confidence in the government in the coming days, unless there was a “last-minute miracle,” in comments to RTL radio translated by Reuters.
If France’s political upheaval comes to a head and Barnier’s government is ousted, it’s unclear what might happen next. New parliamentary elections cannot be held until next June, 12 months after the last snap vote called by French President Emmanuel Macron in an ill-advised move that was intended to bring more political stability but instead produced far less.
Money markets are already jittery about the unraveling of France’s political establishment and what it means for the eurozone’s second-largest economy to tackle its growing debt pile and budget deficit. It is expected to be 6.1% in 2024.. French national debt exceeded 110% of GDP in 2023.
EU countries are obliged to keep the budget deficit within 3% of the gross domestic product and public debt within 60% of GDP. Even before these EU rules came into force, France had a long history of breaching its public spending. Since 1974, the government has not balanced the budget.
The French beer crisis gripped financial markets last week with public borrowing costs reaching the same level as debt-ridden Greece for the first time last thursday.
Overall, France is on the “wrong path,” economists at Holger Schmieding’s Berenberg Bank said in an analysis on Monday, warning that “France urgently needs to fix its unsustainable fiscal policy,” while noting that the Barnier government is now “at the mercy of the National Rally.”
Nevertheless, they noted in emailed comments that Le Pen had to play a carefully calculated political game in the coming days.
“Le Pen may want to present herself as the guardian of ordinary people by opposing some of Barnier’s tax hikes and spending cuts. But doing so would also be risky for her,” they said.
French Prime Minister Michel Barnier (C) before his general policy announcement to the French National Assembly in Paris on October 1, 2024. Barnier, the former right-wing EU Brexit negotiator, was appointed by the French president three weeks ago to provide some stability. following the political chaos of a hung parliament that resulted from snap elections this summer.
Alain Jokar | Afp | Getty Images
“If she now triggers a financial crisis with rising bond yields and possibly a French recession, she could be seen as an agent of chaos rather than a responsible leader.” That, in turn, could hurt her chances of winning the presidency in 2027, they noted.
“This estimate suggests that Le Pen could still try to find a compromise with Barnier, sparing France a political and financial crisis this Christmas,” they noted.
Trouble no matter what?
Even if the 2025 budget passes some “last-minute miracle,” to borrow Bardella’s phrase, economists note that it will be a temporary reprieve from France’s broader fiscal problems.
“If the new and still minority government reaches an agreement with the National Assembly and passes the 2025 budget, it will bring some relief to the markets… However, it will not solve France’s huge budget deficit and public debt problems, which require years of significant fiscal austerity to run a primary surplus,” Mike Gallagher, director of macroeconomics and strategy at Continuum Economics, said on Monday.
“With the end of ultra-low interest rates, the ECB forecasts that France’s debt servicing costs will rise above 4% by 2034, triggering a major and protracted debt crisis. However, further years of fiscal austerity are unlikely before the next parliamentary election from July 2025 and possibly a presidential election in 2027. France needs a high risk premium to reflect the political challenges; consolidation and the risk of non-residents reducing their huge holdings (53% of outstanding debt),” he noted in emailed comments.
People walk in the Chatelet Les Halles area of Paris during the Caetano storm.
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If the budget fails to pass, Gallagher said, there will be increased volatility in Europe’s financial markets.
He warned that the spread, the spread between French and German bond yields, could widen from current levels of around 80 basis points to 150 basis points, and that the European Central Bank might be forced to do something. to calm the markets.
Berenberg Bank agreed that if the French turmoil significantly darkens the euro zone’s growth outlook, the ECB may have to adjust its overall monetary stance by cutting rates more than otherwise planned.
“However, we believe that it is highly unlikely that the ECB will directly support France through bond purchases… There would be no action by the ECB to shield France from the potential consequences of failing to pass the budget. France would have to act alone, perhaps , the center-left and/or Le Pen, rethinking their opposition to the necessary fiscal consolidation,” the Berenberg economists said.
