What to Expect from France? The Meltdown of the French Government and Its Implications
10 DEC, 2024
By Jose Luis Palmer from RankiaPro Europe
The recent collapse of the French government, following Michel Barnier’s resignation after a motion of no confidence in the National Assembly, has plunged the country into increasing political and economic uncertainty. This event has suspended key reforms and France’s fiscal targets, which could have wider consequences, not only for the French economy but also for the stability of the eurozone. With France’s political future uncertain, questions arise about how this power vacuum will affect financial markets and the policies of the European Central Bank (ECB).
What Can We Expect Now?
Fiscal and Economic Outlook
France’s fiscal situation appears complex, with a growing budget deficit and debt continuing to rise. Odile Camblain, Head of Multi-Asset Management at Credit Mutuel Asset Management, notes that Barnier’s outgoing government had proposed austerity measures for 2025, but its fall has complicated the implementation of these plans. According to Camblain, the forecasted deficit of between 5.5% and 5.8% of GDP for 2025, conditional on the achievement of the growth target of the Finance Act (1.1% in 2025), is considered an ambitious target, especially given investor scepticism and weak consumer confidence amid the persistent rise in energy and food prices.
Furthermore, Scope Ratings analysts Thomas Gillet and Brian Marly warn that the collapse of the government will delay fiscal consolidation and essential reforms. In the short term, France’s fiscal outlook is deteriorating, and the 2025 deficit is likely to approach 7% of GDP, which would further increase pressure on public finances.
The collapse of the French government will increase the likelihood of a larger deficit in 2025, approaching 7% of GDP, which would mark the third consecutive year of budgetary deviation.
Scope Ratings analysts Thomas Gillet and Brian Marly
Impact on Europe and the ECB
The fall of the French government also has implications for the Eurozone as a whole. In this context, the ECB may be forced to revise its policies to support the French economy. Camblain explains that the ECB could accelerate its monetary easing process, particularly after comments from ECB President Christine Lagarde regarding downside risks to regional growth. With a probable reduction in interest rates, the ECB could provide the necessary counter-cyclical support to mitigate the negative effects of the political crisis in France.
The ECB could lower the deposit facility rate to 1.75%, exceeding current market expectations, which could provide counter-cyclical support to French economic conditions.
Odile Camblain, Head of Multi-Asset Management at Credit Mutuel Asset Management
The unstable political environment in France could further hinder the government’s ability to implement necessary structural reforms, potentially prolonging the period of economic uncertainty. This would affect not only France but also the growth prospects for the eurozone, which is already grappling with inflation and economic slowdown.
Market Reaction
Regarding the market reaction, the current situation has generated some volatility. Financial markets have shown short-term stability, with Camblain noting that the sovereign bond spreads between France and Germany continue to fluctuate between 70 and 95 basis points. While the fixed-income and equity markets have remained moderate, Scope Ratings analysts warn that any prolongation of political uncertainty could weaken investor confidence and put pressure on France’s credit quality.
Gillet and Marly also suggest that a prolonged political vacuum could be negative for France’s credit rating, particularly if the country is perceived as unable to meet its fiscal commitments. In this scenario, markets could react negatively, reflecting the growing risk of political and economic stagnation in France.
In summary, the collapse of the French government has created a climate of fiscal and political uncertainty that will affect the country’s economic outlook and could have wider implications for Europe. While markets have shown stability in the short term, the lack of political clarity and the potential slowdown in economic growth could have medium- and long-term consequences, both for France and for the eurozone.
