France’s political turmoil casts a long shadow on economic growth

French lawmakers are set to hold a vote of no confidence in Prime Minister Michel Barnier’s fragile minority government on Wednesday, as economists warn that a likely political deadlock will have a high economic cost. .

Two so-called “censure motions” submitted by both left-wing and far-right opposition parties will be debated and voted on starting at 4pm local time. The government is widely seen as likely to be overthrown just three months after taking office. If the government collapses, Barnier is unable to find a compromise in the deeply divided parliament to pass the 2025 budget, which aims to reduce France’s huge budget deficit, and has submitted his resignation to President Emmanuel Macron. will be forced to submit.

From there, uncertainty reigns. Although the left-wing coalition won the most votes in the summer’s snap general election, no party was able to secure a majority, and he is already struggling to appoint a new prime minister. You will need to nominate it. Barnier, a longtime minister, was seen as a technocratic compromiser.

“If Mr. Barnier resigns, President Macron will ask him to continue as interim president. Given the apparent lack of a majority, the alternative of formally reappointing Mr. Barnier is likely. No,” Kirsten Nickel, Teneo’s deputy director of research, said in a note Tuesday.

Nickel said the interim chairmanship could last several months because new elections cannot be held until next year, while Macron’s resignation could trigger a presidential election within 35 days.

He added that this series of events meant the budget was not passed and a last-minute agreement was unlikely.

Therefore, the caretaker government is likely to propose a special constitutional law that would “effectively roll over the 2024 fiscal year without any of the previously envisaged spending cuts or tax increases, while at the same time giving the government the power to continue collecting taxes.” he said.

Amid the turmoil, France’s borrowing costs are rising, while the eurozone is in negative territory, exacerbated by the eurozone’s lackluster manufacturing figures and parallel political instability in Germany. There is.

“France faces the prospect of widening budget deficits, and as (bond) yields rise amid this uncertainty, funding costs will become even higher,” Maybank analysts said in a note Wednesday. Deaf,” he said.

Javier Díaz Jimenez, an economics professor at Spain’s IESE Business School, told CNBC by phone that the situation in France looks “very bad” for foreign investors.

“Without a budget, they will actually default on their debts, not because they can’t pay interest on their debt, but because without a budget they won’t default on their debts. Rating agencies have already warned, and for 10 years “The premium for French government bonds is higher than for French government bonds. “Greece is out of line in terms of fundamentals.” Greece temporarily lost its investment-grade credit rating status during the eurozone debt crisis, leading to a sovereign debt default.

“But that’s because the pension funds don’t care. They just want a reliable source of income without worrying about legal shenanigans. So they dump[French bonds]and go elsewhere. I will go,” Díaz-Jiménez said.

“Beyond economic growth and stability, France will be heading towards an unsustainable debt burden.”

Economists had already cut their growth forecasts for France after October’s budget announcement, taking into account the country’s steep tax increases and public spending cuts.

Analysts at Dutch bank ING had previously predicted that France’s growth rate would slow from 1.1% in 2024 to 0.6% in 2025, but the collapse of the Barnier government meant that the French economy would “It’s going to be bad news for us,” he said on Tuesday.

They also predicted that an interim budget reflecting the 2024 framework would be passed.

“Such a budget would not correct the trajectory of public spending,” they said, abandoning Mr Barnier’s goal of reducing the public deficit from 6% to 5% of GDP in 2025. This means France will not move towards achieving the European Union’s new goals. Fiscal rules.

“This is bad news at a time when France’s economic growth has slowed significantly. Budget deficits will remain high, debt will continue to rise, and the next government – whenever it may be – will have to rebuild its finances. “This is likely to be an even tougher task,” said an analyst at ING.

“France can count on significant domestic savings to replace foreign investors, and eurozone data flows help decouple European and U.S. yields,” Gilles Moeck, group chief economist at AXA, said in a note on Monday. In the medium term, funding the government with too much domestic savings could be costly in terms of growth dynamics.”

“Consumer confidence is already low, and savings rates could rise further, hampering the recovery in consumption that the government is counting on to support tax revenues in 2025,” Moek said.

The gap between France’s borrowing costs and Germany’s borrowing costs widened this month to its highest level in 12 years, with both countries mired in political turmoil.

But Díaz Jimenez of IESE Business School said France’s outlook was in some ways brighter than that of the euro zone’s biggest economies.

“The economic outlook for France is quite bleak, but it will not be a catastrophe if the accompanying risks can be avoided.High budget deficits are difficult to fix and require political harmony, but a solution may still be found. “There’s just more pressure on politicians to do their jobs and solve real problems, in this case fiscal sustainability,” he told CNBC.

“But Germany’s problem is growth. The German economy has to adapt a lot to the new environment without Russian gas, and manufacturing cars in Europe looks like a very bad business plan. From an economic point of view From a French perspective, it is a more difficult problem to solve. ”