Markets React to France's Political Troubles
Photo Courtesy: Jacques Paquier via Flickr
Flashbacks to the Eurozone debt crisis emerged when France’s borrowing costs relative to Germany’s, considered a safe standard, reached their highest level since 2012, briefly surpassing Greece’s borrowing costs earlier this week. France’s 10-year bond yields have now fallen below Greece’s, and remain far below the worrying bond yields seen in various eurozone countries during the debt crisis.
These financial developments occur against the backdrop of political turmoil in France, as the current minority government attempts to pass their budget for the coming financial year. Given its minority position in the National Assembly, the centre-right government must find support from other parties to pass the budget. However, both the far-right ‘Rassemblement National’ (RN) and the Socialists (PS) have rejected such calls for support.
France’s new center-right Prime Minister, Michel Barnier, has spearheaded a budget with tax hikes and spending cuts to solve France’s increasing deficit. In 2024, government deficit reached more than 6% of GDP, double the rate allowed by eurozone rules, reaching 112% debt-to-GDP ratio at the end of the second quarter of 2024.
The ruling parties have made attempts at compromise. On Thursday, the prime minister renounced his plans to hike taxes on electricity bills, as demanded by the RN. Nevertheless, while its leaders celebrated the move as a “victory”, the RN deemed this move insufficient, highlighting other “red lines” that needed to be considered in the budget proposal. These include the scrapping of proposed reductions in healthcare reimbursements and the re-indexation of pensions starting January 1st, 2025.
If the budget fails to pass the parliament, two options remain for the current leadership. It can carry the 2024 government budget forward to 2025, until a new one is approved, or the president can pass the budget without the parliament’s approval, using the constitution’s Article 16. Failure to pass any budget would result in the country’s first shutdown under the Fifth Republic.