After the fall of the government in Paris, French President Emmanuel Macron is trying to allay fears of a paralysis of the country and a financial crisis.
A new prime minister will be appointed quickly given the rejected austerity budget, a bridge solution will be achieved by mid-December and then a new budget will be adopted in early 2025, Macron stressed. Is his announcement enough to avert a serious crisis in France with consequences for the EU?
How critical is France’s financial situation?
The dispute over the 2025 budget concerns how the rapidly rising new debts can be brought under control. Outgoing Prime Minister Michel Barnier had warned that the budget deficit could rise to more than seven percent next year. This would be more than twice as much as stated in the Maastricht Treaty. The national debt ratio was around 110 percent at the end of 2023. This is the third highest value, after Greece and Italy. Overall, France’s debt mountain is around 3.2 trillion euros and is the highest in Europe in absolute terms.
What’s next?
Barnier had proposed a mix of lower spending and higher revenues worth 60 billion euros. That won’t happen now. But even a future prime minister will not be able to avoid fiscal consolidation. There is a risk of a deficit procedure by the European Commission. It will probably be difficult to pass a budget. Because the parties in the political center do not have a majority.
What significance does the crisis in France have for the EU and Germany?France is the largest economy in the eurozone after Germany. The government crisis in France has left both countries without a government fully capable of action. This limits the EU’s ability to act. With Donald Trump coming to power in the US, there is also the threat of a trade conflict and a reversal of Ukrainian policy.
How do the financial markets view the government’s resignation?
Before the no-confidence vote, Barnier warned of serious turbulence if the budget plans and his government failed. However, the reaction on the financial markets was cautious. After the successful vote of no confidence in the National Assembly, risk premiums for French government bonds even fell. However, French government bond yields had risen earlier, temporarily reaching Greek levels for the first time since the creation of the eurozone.
“Market participants frown on France, but do not turn away,” said Ulrich Kater, chief economist at Dekabank. “This is based on the expectation that the second largest economy in the eurozone will offer prospects for consolidating its budget despite all internal political disagreements.” This is especially true when the financial markets are sending clear stress signals.
Are comparisons with the crisis in Greece 2010-2012 justified?
Comparisons with Greece have increased recently. However, these remain behind. France has a strong economy and functioning institutions. The Organization for Economic Co-operation and Development (OECD) expects economic growth of 1.1 percent in France this year. Only stagnation is expected for Germany. The interest rates that France has to pay on the capital markets are still considerably lower than in Greece at the time of the euro crisis.
“We don’t expect the French mess to trigger anything comparable to the euro confidence crisis of 2010-2012,” said Holger Schmieding, chief economist at Berenberg Bank. He does not expect discussions about leaving the eurozone. “Europe has learned the lesson of Brexit.” Even Marine Le Pen no longer wants to leave the euro or the EU.
What dangers still threaten?
The rating agencies could further downgrade France’s credit rating. This will likely make borrowing even more expensive. “This event is bad for creditworthiness,” said rating agency Moody’s, referring to the mood from the government in Paris. Moreover, there are no stable political conditions in sight in France in the medium term. Political uncertainty could therefore also weigh on companies’ investments. Finally, it is unclear what future tax legislation will look like.
How could the ECB respond to a possible worsening of the crisis?
In contrast to the sovereign debt crisis of 2011 and 2012, the European Central Bank (ECB) has effective instruments. The TPI bond purchasing program launched during the euro crisis allowed it to buy unlimited amounts of bonds from individual euro states in the event of a crisis. “The very fact that the ECB can intervene should prevent spillovers to other countries and should not drive French yield spreads to the heights reported in 2011,” said Thomas Gitzel, chief economist at VP Bank. “Nervousness will probably remain high for the time being, but no further euro crisis is to be expected – the ECB’s protective shields are too strong for that.”
Source: Krone
I am Wallace Jones, an experienced journalist. I specialize in writing for the world section of Today Times Live. With over a decade of experience, I have developed an eye for detail when it comes to reporting on local and global stories. My passion lies in uncovering the truth through my investigative skills and creating thought-provoking content that resonates with readers worldwide.
