(Bloomberg) -- France’s government offered a final-hour concession to Marine Le Pen on the 2025 budget, seeking to avoid being ousted from power in a no-confidence vote that would plunge the country into financial and political uncertainty.
Prime Minister Michel Barnier committed to not cutting reimbursements for medicines, caving to yet another key demand from the far-right after crisis talks with Le Pen earlier Monday.
The concession is a last-ditch attempt by the French premier to keep the budget bill on track and remain in office. Without a majority in parliament, Barnier was set to resort to using a constitutional provision that allows for the adoption of the social security bill without a vote, but opens the door to no-confidence motions.
Le Pen’s National Rally party, the largest in the lower house, said earlier Monday it would ensure the government falls, barring a “miracle” compromise on their demands.
The uncertainty and brinkmanship has pushed bond investors to punish France’s sovereign debt relative to its peers, driving up borrowing costs at one point last week as high as Greece’s and leading Barnier to warn of a “storm” in financial markets if he is dismissed from power.
But French assets were volatile after Barnier’s latest concession on Monday. The spread between French and German 10-year bonds initially narrowed sharply, before widening to around 84 basis points, just below the session-high of 87. French stocks traded sideways, erasing most gains after a brief spike when Barnier’s office announced the concession on medicine reimbursements.
National Rally lawmakers held a meeting at 2 p.m. in Paris to decide what course of action to take. Speaking afterward, Le Pen did not comment on the medical bills concession, instead saying her party has proposed a last-minute amendment to cancel plans to curb the indexation of pensions — the final key budget demand Barnier has not yet met.
“It’s up to the government to accept it or not,” Le Pen said in comments from the National Assembly broadcast on BFM TV.
Barnier was always likely to need to use the constitutional mechanism, called Article 49.3, to pass the budget because he is far short of having a majority in the National Assembly. But the timing is particularly hazardous for France’s finances as the government must adopt a budget by year-end or use untested emergency legislation to avoid a shutdown.
If Barnier uses the constitutional tool later Monday, opposition groups will have 24 hours to file no-confidence motions. Following that, 48 hours must elapse before parliament begins to debate the proposal and a no-confidence ballot must take place within three days of that.
An abstention by Le Pen in the no-confidence vote would suffice to save Barnier, but she has equivocated in recent weeks, increasingly complaining the government was failing to take on board National Rally demands.
If the government is voted down, ministers remain in place with a caretaker status to manage current affairs, potentially including the emergency legislation to avoid a shutdown. It would then be up to President Emmanuel Macron to appoint a new prime minister, although there is no constitutional deadline for his decision.
The political difficulties and market jitters began in June when Macron called snap elections after getting trounced in European elections. That left the lower house split into three fiercely opposed blocs: a diminished center supporting the president, a leftist alliance and a strengthened far right led by Le Pen. With no coalition possible, Macron appointed Barnier prime minister in September with a core mission to get France’s messy finances in order.
Even before the political turbulence of the last several weeks, France’s finances were a growing concern for investors as plans to reduce debt slipped off course at the end of 2024. With tax revenue far below estimates, the government now expects the budget deficit to reach 6.1% of economic output this year instead of declining to 4.4% as initially planned.
Barnier’s 2025 budget aims to narrow the gap to 5% with shock therapy of €60 billion of tax increases and spending cuts. In the interview, Armand insisted that wavering on the commitment to reduce the budget deficit toward 5% in 2025 and toward 3% to in 2029 was “not an option.”
--With assistance from Constantine Courcoulas, James Regan and Ania Nussbaum.
(Updates with market reaction and Le Pen comment from 6th paragraph)
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