France has been thrown into political chaos after the fall of Prime Minister Michel Barnier’s government this week. Even in an optimistic scenario where the mayhem only drags on for a few months, it will exact a toll on the economy that will last for years.
The French parliament rejected a budget that was only the first step in a multi-year process to control the rise of the country’s debt load. Ironically, those measures were greenlighted by the European Commission days before this week’s no-confidence vote. Under the plan, public debt would have risen from 113% of GDP this year to more than 116% in 2028, and begun to shrink, albeit slowly, thereafter.
That was conditioned on the fiscal deficit declining to 5% of GDP in 2025, from more than 6% this year. Barnier’s concessions in the last few weeks to convince MPs to back his budget amounted to some 10 billion euros, or about 0.4% of France’s GDP. Debt was already on track to top 120% of GDP in 2028. If no measures were taken to control public finances, the deficit would reach 7% of GDP next year, according to the French government. In that case, the debt load would rise to some 125% of GDP by the end of the decade.
Those predictions are based on the government’s generous assumptions about growth, seen at 1.1% next year, whereas the European Commission’s estimate is 0.8%. Without a serious plan, the inexorable rise of the debt load over the next decade will trigger a major conflict with Brussels and France’s European Union partners. And it will require a much harsher bout of austerity than the mild version Barnier proposed.
The political crisis has already exacted an economic price. Uncertainty means that business will be reluctant to invest. The level of confidence of French companies was already lower than the euro zone’s average. And consumers do not seem to be rushing to take advantage of lower inflation either: they are stashing money away at a pace not seen since the late 1970s, with their savings rate now at 19%, AXA chief economist Gilles Moëc has noted.
With the two major engines of economic growth stalling, the government will see tax receipts shrink since the third engine – exports – is not taxed.
The task of devising a sensible and growth-friendly budget, given the state of France’s finances, would be uncommonly arduous even for a strong government supported by a stable majority. For the next French PM, it will be more like mission impossible.
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CONTEXT NEWS
French President Emmanuel Macron said on Dec. 5 that he will appoint a new prime minister in the coming days, whose priority will be to have a 2025 budget adopted by parliament.
Macron was speaking a day after the government of PM Michel Barnier collapsed after a no-confidence vote by lawmakers from the left and the far right.
The French president denied he was responsible for the political crisis, after having called in June for surprise snap elections that led to a hung parliament. He also insisted he wouldn’t resign and vowed to serve his full five-year term until 2027.
