(Bloomberg) -- France’s government risks collapse before the end of the week, with potentially painful economic and financial consequences.
On Monday, Marine Le Pen’s far-right National Rally said it will back a motion to topple the French government, after Prime Minister Michel Barnier failed to agree to all of its demands on next year’s budget.
Here’s a guide to what happens next:
How quickly could things play out?
The French premier declared at the National Assembly on Monday that he would use a constitutional mechanism that allows for the adoption of the social security bill without a vote, but opens the door to no-confidence motions. Immediately after that announcement, the National Rally said it would support censuring the government.
Because Le Pen’s party is the largest in the lower house of parliament, her backing makes it likely Barnier will be ousted as things stand.
After opposition groups filed censure motions on Monday, 48 hours must elapse before parliament begins to debate. No-confidence ballots could then come as early as Wednesday.
Constitutional experts, politicians and economists do not agree on exactly what would come next in such an untested scenario so close to the end-of-year deadline for the budget.
Bills rejected by censure in France are not technically dead, but a caretaker government has little legitimacy to carry them through parliament or attempt implementation with statutory measures.
There are provisions available to avoid a complete shutdown on Jan. 1, but how a weakened government implements those — and the subsequent impact of using such maneuvers — are hard to predict.
“At the end of day there is no instruction manual on what to do if a budget isn’t adopted,” Oddo BHF’s chief economist Bruno Cavalier said. “We are testing the limits of a system in a country that was supposed to have the political stability of a kind of republican monarchy.”
Is France at risk of a U.S.-style shutdown?
The risk of an American-style federal public-services shutdown is close to zero thanks to the existence of an emergency bill — known as a loi spéciale — to get parliamentary authorization to collect taxes in January. The “special law” would allow the government to carry over the prior year’s budget for a few months into the new year.
However, there are risks with using the stopgap measure that are hard to predict. The procedure entails authorizing only the minimum spending the government considers vital to continue providing public services, and no more than voted in the 2024 budget. Depending on the interpretation, that could lead to severe belt tightening, particularly in areas like defense where spending was due to increase.
“The loi spéciale just allows the state to function, it does not allow the government to add political elements to the budget,” public law professor Anne-Charlene Bezzina said. “It would really be austerity, purely current expenditure.”
Adding to the uncertainty, the loi spéciale in the form adopted in 2001 has never before been used. Similar measures were deployed in 1962 and 1979, but in very different circumstances — and not because of a government collapsing in an attempt to pass a budget.
“This crisis is multifaceted,” Bezzina said. “It’s like unpicking one stitch and everything is destabilized.”
What does this mean for Macron?
If the censure motion passes, Barnier’s government would serve in caretaker capacity until Macron names a new prime minister — or reappoints Barnier — to make another attempt at a budget. But there is no obvious candidate who could command a majority spanning three bitterly opposed blocs in the National Assembly.
A second option would be fresh legislative elections to change the balance of power in parliament, but Macron cannot do that until the summer of 2025, a year after the last ballot.
With no obvious way to restore political stability, opposition parties have called for his resignation — what Le Pen described on Monday as a third option.
“Our constitution is clear when there is a grave political crisis,” Le Pen said. “It’s the president’s decision and his responsibility.”
But Macron cannot be forced out of his job and the next presidential election, in which Le Pen remains a frontrunner according to polls, is set for 2027. After making efforts to sanitize her party’s image from the days of her father Jean-Marie Le Pen, a precipitous vote on Macron’s successor could be harder for her to game plan.
How are markets responding?
The perilous political situation has sparked investors to sell French assets. It has pushed the yield premium on 10-year borrowing back to levels not seen since the euro crisis, signaling greater market stress than when President Macron first triggered months of political upheaval by dissolving the National Assembly in June.
French bonds and stocks came under renewed selling pressure Monday afternoon after Le Pen’s party said they would support a no-confidence vote.
The spread between 10-year French and German notes was eight basis points wider on the day at 89 basis points, nearing the highest level since 2012 and on course for the largest widening move since June. The CAC 40 Index traded 0.4% lower, while the euro tumbled more than 1%.
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