Marine Le Pen (L), President of the Rassemblement National (Rassemblement National) parliamentary group, speaks with President and leading MEP Jordan Bardella during the parliamentary seminar of the far-right French party Rassemblement National (National Rally) RN at the French National Assembly on September 14, 2024 in Paris.
Ludovic Marin | Afp | Getty Images
France could experience a political earthquake in the coming days after the far-right Rassemblement National party gave the government a deadline of Monday to agree on new concessions for the 2025 budget or face a vote of no confidence it said it would support.
The National Rally (RN), led by Marine Le Pen and Jordan Bardella, has so far failed to meet most of its budget demands in negotiations with Prime Minister Michel Barnier over next year's budget, which includes taxes worth 60 billion euros ( $63 billion) includes increases and spending cuts.
RN said that if there was no breakthrough on Monday, it would most likely support a vote of no confidence that the left-wing New Popular Front (NFP) alliance said it had already drawn up against the minority government that Barnier has only led since September.
The left-wing bloc said it plans to table the no-confidence motion if Barnier's government uses special constitutional powers to push through the draft budget, a move that would see it face opposition from both the left and the right in the National Assembly, France's Parliament, trumped.
According to French news agency Agence France-Presse, Le Pen said on Sunday that the government had effectively “ended” discussions on the budget. Barnier now faces the choice of negotiating new concessions or threatening that his government will fail in a confidence vote.
RN says the budget reduces the purchasing power of the French and wants concessions on tax increases that would supposedly affect households and businesses. Among its demands, the party wants Barnier to raise pensions in line with inflation in January, increase support for smaller businesses and abandon plans to reduce drug costs. The Prime Minister has already abandoned a planned increase in electricity tax.
On Monday, RN President Bardella reiterated in comments to RTL Radio translated by Reuters that the party would likely support a motion of no confidence in the government in the coming days unless a last-minute miracle occurs.
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If political unrest in France worsens and Barnier's government is overthrown, it is uncertain what might happen next. New parliamentary elections cannot be held until next June, 12 months after the last early vote called by French President Emmanuel Macron in an ill-advised move aimed at greater political stability but which, on the contrary, achieved far less.
Money markets are already nervous about the unraveling of France's political establishment and what this means for the euro zone's second-largest economy to get to grips with its growing debt pile and budget deficit, which is expected to reach 6.1% in 2024. will lie. France's national debt was over 110%. of GDP in 2023.
Countries within the EU are obliged to limit their budget deficit to 3% of gross domestic product and their public debt to 60% of GDP. Even before these EU regulations came into force, France had long failed to control its public spending, as no government had balanced its budget since 1974.
France's brewing crisis spilled over into financial markets last week, with the country's borrowing costs reaching the same level as those of indebted Greece last Thursday for the first time on record.
French Prime Minister Michel Barnier (center) before his general political statement to the French National Assembly on October 1, 2024 in Paris. Barnier, a right-wing former EU Brexit negotiator, was appointed by the French president three weeks ago to provide some stability after the political chaos caused by a deadlocked parliament following snap elections this summer.
Alain Jocard | Afp | Getty Images
Overall, France is on the “wrong path,” Berenberg Bank economists led by Holger Schmieding said in an analysis on Monday, warning that “France urgently needs to correct its unsustainable financial policies.” “At the mercy of the National Rally.”
Still, in the email comments, they suggested that Le Pen would have to play a carefully calculated political game in the coming days.
“Le Pen may want to present herself as a protector of ordinary people by rejecting some of Barnier's tax increases and spending cuts. But that would also be risky for them,” they said.
“If she now causes a financial crisis with a rise in bond yields and possibly a French recession, she could be seen as a cause of chaos rather than a responsible leader.” That, in turn, could hurt her chances of winning the presidency in 2027, they noted firmly.
“This calculation suggests that Le Pen may still be trying to find a compromise with Barnier to spare France a political and financial crisis at Christmas,” they noted.
Trouble, what's happening?
Even if the 2025 budget succeeds like a “last-minute miracle,” as Bardella put it, it will only be a short-lived relief from France's broader fiscal challenges, economists say.
“If the new and still very minority government reaches an agreement with National Rally and adopts the 2025 budget, this will lead to some relaxation in the markets… However, this would reduce France's huge budget deficit and public debt problems require years of work, not fix “Significant fiscal tightening is required to achieve a primary surplus,” Mike Gallagher, director of macroeconomics and strategy at Continuum Economics, said in a note on Monday.
“With the end of ultra-low interest rates, France's debt servicing costs will rise to over 4% by 2034, according to the ECB forecast, which would lead to a major and prolonged debt crisis. However, further multi-year fiscal tightening is unlikely until then.” The next parliamentary elections will take place in July 2025 and possibly the presidential elections in 2027. France needs a high-risk premium to take into account the insufficient momentum in fiscal consolidation and the risk that non-residents will join it Budget significantly reduce inventory (53% of outstanding debt),” he noted in emailed comments.
People walk through the Chatelet Les Halles neighborhood in Paris during the snowfall of Storm Caetano.
Sopa pictures | Light rocket | Getty Images
If the budget is not passed, Gallager said, volatility on the European financial markets will increase.
He warned that the spread – the difference in yields between French and German bonds – could rise to 150 basis points from the current level of around 80 basis points and that the European Central Bank may be forced to take some form of action. to calm the markets.
Berenberg Bank agreed that the ECB might adjust its overall monetary policy stance and cut interest rates more than planned if turmoil in France significantly dampens the outlook for euro zone growth.
“However, we consider it highly unlikely that the ECB would directly support France with bond purchases… The ECB would not be tasked with sparing France the possible consequences of not adopting a budget. France would have to act.” “We will come together on our own, perhaps as the center-left and/or Le Pen reconsider their opposition to the necessary fiscal consolidation,” Berenberg's economists said.
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