(Bloomberg) -- France’s efforts to repair its public finances are threatening a new political and financial crisis, prompting investors to sell some of the nation’s assets.
Prime Minister Michel Barnier’s attempts to stem the nation’s rising debt are faltering as opposition lawmakers threaten to eject him from office in order to stymie the 2025 budget bill.
The uncertainty has led to a selloff of French assets, widening the gap between the country’s financing costs and Germany’s to levels not seen since the euro’s debt crisis more than a decade ago.
How did France get here?
The political difficulties and market jitters began in June when President Emmanuel Macron called snap elections in a bid to bring clarity in a National Assembly where his party was already short of an outright majority.
The gamble backfired, leaving 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 Marine Le Pen.
With no coalition possible, Macron eventually appointed Barnier prime minister in September with a core mission to get France’s messy finances in order.
Why is PM Barnier in danger?
Legislating was always going to be a difficult task without a majority, especially for a budget because opposition parties in France conventionally vote against finance bills, whatever the circumstances.
Governments in that situation can resort to using a constitutional provision known as article 49.3 to adopt a bill without a vote. But such a maneuver exposes a prime minister to a no-confidence motion that, if backed by a majority of lawmakers, evicts them from office, and effectively kills the bill.
Former Prime Minister Elisabeth Borne used 49.3 repeatedly to bypass parliament on the 2024 budget plans. She survived each time, but Barnier has the backing of far fewer lawmakers, making it riskier to trigger multiple no-confidence votes. He has instead let the parliamentary process run its course, saying he will likely use the tool in the final stages in mid-December.
Why is Le Pen a threat?
The leftist bloc — the New Popular Front — has pledged to propose no-confidence votes if the government uses article 49.3, but parliamentary math means the motions will not pass without the support of other opposition groups. That has given far-right leader Le Pen and her lawmakers the role of de-facto powerbroker. Her National Rally is the single biggest party in parliament.
At the start of the budgetary debate, Le Pen took a constructive approach, saying it was urgent to repair public finances and her party would not seek to provoke chaos. There is also little obvious political gain for her as no legislative elections can be held until the summer of 2025.
But in recent weeks she has repeatedly wielded the threat of ejecting Barnier and slammed the government for not including National Rally proposals during the budget debates.
How are markets reacting?
The National Rally’s increasingly combative stance has encouraged investors to bet Le Pen is preparing to pull the trigger and unleash turmoil. Selling of French assets has hurt banking stocks and pushed up the premium on 10-year government bonds over German equivalents to the highest level since 2012 and caused French borrowing costs to match those of Greece. France’s benchmark equity index is on track for its worst year relative to European shares since 2010.
Even before the political turbulence of the last 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 revenues 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 was aimed at reducing the gap to 5% with shock therapy of €60 billion ($63.4 billion) of tax increases and spending cuts. Even if he can scrape through, that target is increasingly in question as ministers have pledged to soften some of the measures.
What’s next?
A string of parliamentary showdowns loom as France nears its budget deadline. Barnier will almost certainly need to trigger 49.3 on both parts of next year’s budget — the main text and the separate social security bill, as well as on a revised finance law on spending through the end of 2024.
The first use of the tool could come as soon as Monday when the social security portion of the bill is expected to return to the National Assembly from a committee between the two houses of parliament that produces a unified draft. A subsequent attempt to censure the government could then be debated and voted Dec. 4, Eric Coquerel, the leftist chairman of the National Assembly’s finance committee, said on RTL radio.
The social security bill contains some emblematic measures that Le Pen opposes, including delayed indexation of some pensions and changes to medicine reimbursements. But the National Rally may hold back until the final budget bill returns to the lower house around Dec. 18, potentially setting up Dec. 20 as the ultimate no-confidence test for Barnier.
The government could yet avert a crisis as it mulls concessions to opposition parties, Finance Minister Antoine Armand said Thursday. “The question is whether it’s better to have a budget that is not exactly the one we want or no budget,” Armand said on RMC radio.
What happens if Barnier’s government falls?
There aren’t precedents for a government collapsing so close to the end-year deadline for a budget. Lawmakers and legal experts have pointed to emergency measures in a “special law” to permit the state to collect taxes and decrees to authorize minimal spending in order to avoid a shutdown.
The National Rally has said it would support such an outcome, while ministers have warned it could inflict harmful austerity and impair efforts to repair finances.
If Barnier is evicted from office, Macron would have to re-appoint him or pick a new premier. But the president would face the same difficult balancing act with no possibility for fresh legislative elections until July.
Any new government that emerges would still need to urgently propose a 2025 budget.
--With assistance from Julien Ponthus and Alice Gledhill.
©2024 Bloomberg L.P.