- French Prime Minister Michel Barnier lost a confidence vote on Wednesday.
- The vote was triggered after he forced through part of the 2025 Budget using an executive decree.
- It was the first successful vote of no confidence in more than 60 years in France.
Michel Barnier, the French Prime Minister, lost a vote of no-confidence vote in the National Assembly on Wednesday after left and far-right parties voted together.
The collapse of the three-month-old government makes Barnier France’s shortest-serving prime minister and could bring further upheaval to financial markets.
What’s going on with France’s public finances?
France’s government deficit has ballooned in recent years after spending billions on Covid subsidies, tax cuts, and subsidizing energy bills that soared following Russia’s invasion of Ukraine in early 2022.
The European Union expects France’s government deficit to reach 6.2% of GDP this year — more than double the EU limit — before declining to 5.3% in 2025. France is facing an EU review over its deficit, although that’s also the case for other member nations including Italy and Poland.
France will spend more on servicing government borrowing this year than it spends on defense.
Late last month French government borrowing costs briefly exceeded that of Greece, underlining investors’ concern about its economic trajectory. It was a notable moment because Greece was at the center of the eurozone debt crisis less than 15 years ago.
Why was the Budget a big problem?
Emmanuel Macron, the French President, appointed Barnier as Prime Minister in September in the hopes of breaking a political deadlock following elections in July that left him without a parliamentary majority.
Macron hoped Barnier, who led the EU’s negotiations with Britain after its decision to leave the EU, could overcome differences with opposition parties and pass the 2025 Budget.
It would have raised taxes and cut spending to the tune of about 60 billion euros ($63 billion) to help restore the public finances.
However, after weeks of negotiations, amendments, and concessions to opposition parties, Barnier used an executive order on Monday to force part of it through without the approval of lawmakers in the lower house.
In response, the far-right National Rally led by Marine Le Pen vowed to support a no-confidence motion brought by the pan-left New Popular Front.
On Tuesday, Barnier said he was open to negotiations with all political parties amid a “serious” and “difficult” situation.
However, his pleas fell on deaf ears and the motion was passed by 331 votes — the first time a no-confidence vote has succeeded in France since 1962.
What happens next?
Barnier is expected to tender his resignation but may continue as a caretaker until a new prime minister is appointed. That could prove difficult for Macron, however.
The fate of the 2025 Budget remains unclear but it is unlikely to be passed, although that does not mean there will be a US-style government shutdown in France. Instead, a provisional Budget mirroring this year’s document is likely to be implemented, wrote economists at ING.
Bruno Cavalier, Oddo BHF’s chief economist, told Bloomberg that failure to pass the Budget would “test the limits of a system in a country that was supposed to have the political stability of a kind of republican monarch.”
Antonio Fatas, macroeconomist and professor of economics at INSEAD, a French business school, told BI ahead of the vote there was no reason for the rest of the European Union to panic as he didn’t expect “contagion” to spread.
However, Fatas said the bloc could do without such a headache, given its anemic economic growth.
The political uncertainty France now faces could trigger a spike in borrowing costs and worsen its already strained public finances.
