As you will have no doubt been reading over the last few days, the French government, led by Prime Minister Michel Barnier, is on the cusp of collapse due to a contentious 2025 budget battle in the National Assembly.
This doesn’t come as a surprise to us following Barnier’s appointment in September, post what was a disastrous General Election for President Emmanuel Macron. In making this decision, Macron faced significant opposition from both the far-left and far-right, which has made the budget impasse almost inevitable.
In the face of increased opposition to his budget, Barnier used executive powers under Article 49.3 of the French Constitution to force it through. This triggered an almost immediate response from the far-left France Unbowed (or La France Insoumise (LFI) party) and Marine Le Pen’s far-right National Rally, with both parties indicating they would table no-confidence votes. A simple majority can bring down the government. Awkwardly, a new election cannot be called until July 2025.
The broader implications of a government collapse are significant. Stopgap measures will be employed to prevent administrative paralysis, albeit it’s just a sticky plaster.
As we have highlighted before, France is running a budget deficit of over 6% of GDP, in breach of EU fiscal rules. In response, we have seen 10-year French bond spreads relative to Germany, increase to their highest level since the Eurozone crisis.
Yield spread 10-Year France vs Germany
Source: Bloomberg Finance L.P.
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