The French government collapses, raising default risk and worsening woes due to political deadlock.

On December 4th, local time, the French National Assembly passed a motion of no confidence against the current government, marking the first time since 1962 that a French government has been ousted by such a vote. French Prime Minister Barnier, who had only been in office for three months, announced his resignation, becoming the shortest-serving prime minister in the history of the Fifth French Republic. This event has caused not only political upheaval but also exacerbated France's economic difficulties, with economists warning of serious fiscal consequences and even the risk of a debt default.

Political Fragmentation and Deadlock Worsen Government Challenges

In September, French President Macron appointed right-wing Republican Barnier as Prime Minister, hoping that this experienced politician could stabilize the government. However, the new French National Assembly is severely politically fragmented, with the left wing, far right, and centrists unable to secure an absolute majority. The left "New People's Front" holds 193 seats, the centrists have 166 seats, and the far-right and its allies hold 142 seats. In this political landscape, Barnier's government faced difficulties in functioning effectively from the start.

Against this backdrop, Barnier attempted to bypass the assembly and push through a social security bill. This move triggered strong backlash from the far-right National Rally and the left-wing parties, who together proposed a motion of no confidence, which was successfully passed in the December 4th vote, leading to Barnier's government's downfall.

Government Collapse Brings Severe Economic Consequences

The collapse of the French government has not only thrown the domestic political scene into chaos but also had serious impacts on the economy. Economists widely warn that the political deadlock could result in France being unable to pass the 2025 budget on time, exacerbating the public deficit, causing bond yields to soar, and severely damaging international investor confidence.

Javier Díaz-Giménez, an economics professor at Spain's IESE Business School, noted that if France fails to submit the budget on time, it might face the risk of a debt default. While France's fiscal capacity might not be in question, rating agencies have expressed concerns, and France's 10-year bond risk premium is currently higher than that of Greece, leading to increased financing costs.

AXA's chief economist Gilles Moëc stated that although France could rely on domestic savings to fill the gap left by international investors, this would mean suppressing the potential for domestic economic growth. An increase in savings rates alongside declining consumer confidence might impact the government's plan to rely on a consumer rebound to drive economic recovery, affecting tax expectations and economic growth.

Challenges for the 2025 Budget and Gloomy Economic Prospects

In the 2025 budget announced this October, the French government planned to reduce the deficit-to-GDP ratio from 6% to 5% through tax increases and cuts in public spending. However, with Barnier's government collapsed, this target has become elusive. Economists predict that even with a temporary budget, France will struggle to curb excessive public spending, moving further away from the EU's fiscal rule requirements.

Additionally, the pace of French economic growth is under downward pressure. The economic growth rate is expected to be 1.1% in 2024 and could fall to just 0.6% by 2025. The persistent high public deficit and worsening debt issues present a grim challenge. Moving forward, whether Barnier’s successor or a new government, tough fiscal reforms will be necessary, balancing political and economic priorities will be a primary challenge for the French government.

The government's collapse has not only caused significant turmoil in French politics but has also profoundly impacted the future development of the domestic economy. Whether France can recover from this political crisis and successfully address its increasingly severe fiscal issues remains a significant question facing the government.

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