The collapse of Michel Barnier’s government, who held the office of Prime Minister since September 2023, triggered a serious political and economic crisis. Barnier stepped down after a vote of no confidence was passed, which was the result of a budget dispute. His tenure, which lasted only a few months, turned out to be the shortest in the history of the Fifth Republic of France.
The key point of conflict was the 2025 budget project. The proposal suggested spending cuts and tax increases amounting to 60 billion euros, intending to reduce the budget deficit from 6.1% of GDP in 2023 to 5% in 2025. However, this met with harsh criticism from both the far-right and the left. Marine Le Pen, the far-right leader, described this plan as “toxic for French people,” leading to cooperation between opposing ideologies against the government.
The political turmoil is impacting financial markets. The spread between French and German bonds has reached over 80 basis points, the highest level since 2012, indicating increasing political risk. The yield on 10-year French bonds is currently 2.90%, whereas German yield is 2.08%. The EURUSD rate ahead of tomorrow’s NFP announcement is 1.0528, and the CAC40 index stands at 7332.6 points, reflecting investor uncertainty.
President Emmanuel Macron faces the tough task of finding a new prime minister who can build support in a divided parliament. Previous attempts to form a coalition have run into significant difficulties, and new parliamentary elections can take place at the earliest in July 2024. Despite mounting opposition pressure, Macron announced he will not resign before the end of his term in 2027. Marine Le Pen is not only exerting pressure on the president but also expresses willingness to cooperate on a new budget, provided her demands are met.
The interim government is currently utilizing exceptional measures to ensure basic state funding and tax collection. However, the finance minister warns that such solutions will increase the tax burden on households and negatively impact key areas such as security and agriculture.
Macron and his allies are striving to rebuild the “Republican Front” – a coalition of mainstream parties – to convince moderate socialists to break ties with the radical left. The political and economic situation in France remains tense, and the further development of events depends on the decisions of the president and the new government. The key challenge will be to defuse the political crisis and rebuild investor confidence to avoid exacerbating economic problems.
Author: Krzysztof Kamiński, Oanda TMS Brokers.
Source: https://ceo.com.pl/we-francji-upada-rzad-co-dalej-86820
