France’s borrowing costs have surpassed Greece’s as investors worry about the French government’s ability to pass a deficit-cutting budget – and its ability to survive at all.
The far-right National Assembly, led by Marine Le Pen, has threatened to support a vote of no confidence in the government as early as next week if its demand for changes to the draft 2025 finance law is not met.
Prime Minister Michel Barnier responded by dramatizing the situation in the hope that his opponents would step down or risk being accused of market chaos. Earlier this week, he warned of a “big storm” in financial markets if his minority government is toppled.
– said government spokeswoman Maud Bregeon France was faced with a possible “Greek scenario”. Finance Minister Antoine Armand compared France to “a high-flying plane threatened with stalling”.
Is France really facing a Greek-style debt crisis?
“For now, it’s a complete exaggeration,” said Éric Heyer, a professor of economics at Sciences Po.
France has full access to debt markets. On Monday, it collected 8.3 billion euros. The 10-year yield on French government debt is around 3 percent. At the height of the debt crisis, the yield on Greek debt rose above 16 percent. Greece’s economy has cratered, exacerbated by punishing austerity measures, and Athens is embroiled in a bitter battle with Berlin and Brussels over the terms of its eurozone bailout.
During the recent political turmoil in France, the spread between its debt and German debt widened by just 0.3 percentage points, Heyer said.
Even so, investors have been rattled by a combination of political paralysis and poor public finances. The public deficit is likely to reach 6.2 percent of GDP, and Paris is under pressure from the market and the EU to take corrective measures.
Although France has not had a balanced budget for five decades, it has reached a point where it can no longer rely on economic growth to keep debt sustainable, the country’s Council for Economic Analysis noted earlier this year.
Why is the adoption of the budget so difficult?
For two reasons, said Antoine Bristielle, director of the opinion observatory at the Fondation Jean Jaurès think-tank.
First, the government does not have an absolute majority, which means that any text requires negotiations with the RN or the left-wing Nouveau Front Populaire bloc. Second, tight public finances mean Barnier is making tough and unpopular decisions to meet his target of reducing the deficit from 6 percent to 5 percent of GDP in 2024.
He proposed a €60 billion consolidation package, which he claimed would be mostly spending cuts, but in fact relies heavily on tax increases. This is unacceptable for RN and NFP, who campaigned this summer on promises to increase the purchasing power of the French.
There has also been resistance from President Emmanuel Macron’s centrist alliance and the center-right Republicans, who nominally support Barnier’s government.
With little room to manoeuvre, Barnier said he would likely be forced to use a constitutional procedure known as 49.3, which allows the government to pass legislation without a vote in parliament but also exposes it to a motion of no confidence.
The left-wing bloc has promised to submit such a request and now the RN could give it the votes it needs to succeed.
That could happen as early as next week, when parliament votes on a bill to finance social security, a budget supplement, or later in the month. The budget they must be passed by December 21.
What is Le Pen’s game?
The far-right leader demanded that Barnier abandon higher electricity tariffs and instead come up with bigger spending cuts. She also wants to keep indexation of pensions to inflation, reimbursement of drug costs and tax credits for social security for employers. Last week, she threatened to overthrow the government if she didn’t get hers.
Barnier tried to pressure her by implicitly saying that she would be to blame for the financial turmoil that would ensue if the budget failed and the government fell. The RN countered that there would be no US-style financial chaos or government shutdown, as the 2024 budget could be pushed through special legislation.
Bristielle said: “The problem (of the RN) is that they both have a strategy of being seen as a respectable party that . . . it guarantees a certain stability, while at the same time not disappointing its electorate.”
On Thursday, Barnier was the first to blink, abandoning the planned increase in electricity taxes, albeit at a cost of 3.8 billion euros.
This is a big concession to RN. But some analysts say Le Pen may have decided her tacit support for Barnier’s increasingly unpopular government is no longer worth the political costs. One factor could be the verdict due next March in her trial for embezzling EU funds, which could see her barred from public office, ending her presidential ambitions.
“Why should she look like a statesman when she risks not being able to run for president in three years?” Mujtaba Rahman, managing director of Eurasia Group wrote in a note to clients, pointing to Le Pen’s shift from conciliatory to populist rhetoric in recent days.
Is France becoming ungovernable?
Difficulties in passing the budget do not bode well for the long-term survival of the Barnier government or the future governance of France.
If the government falls, parliament could pass an emergency law to change this year’s budget.
If Macron could somehow appoint a new government, it could seek to renegotiate the budget, with less ambitious austerity measures, Heyer said. However, the possibilities of forming any parliamentary majority are only narrowing.
There is also the possibility of a “technical government”, with limited decision-making powers, until new legislative elections are held in the summer, a year after France last voted, the earliest possible under the constitution.
Ultimately, the prolonged paralysis is likely to put pressure on Macron to resign to allow for a political reboot through new presidential elections.
Bristielle said: “I’m not sure that leaving power is at the heart of his strategy. However, he showed that he can at least surprise us.”
Data visualization by Keith Fray
