French Government Collapse Challenges Macron's Grip on Power

The French government collapsed for the first time since 1962 after factions within parliament could not agree on efforts to reduce the country's debt crisis. 

Prime Minister Michel Barnier was ousted in a no-confidence vote on December 4. Backed by 331 members of the National Assembly, the ousting came just three months after President Emmanuel Macron appointed him following snap elections and the resignation of former Prime Minister Gabriel Attal in June and July. 

The government's collapse followed months of contentious debate over Barnier's budget proposals to curb France's mounting debt through tax hikes and spending cuts. However, the bill faced staunch opposition from left-wing alliances and the populist far-right National Rally leader, Marine Le Pen.

Amid mounting pressure to name a new prime minister, Macron held talks with political parties willing to compromise on forming a government on Tuesday, resulting in Macron claiming to find a new Prime Minister by Thursday.  He has also announced his plan to serve the remainder of his term until 2027. 

Macron's Rule Threatened by French Government Collapse

The instability has raised doubts about Macron's grip on power. Members of the far-left France Unbowed party (LFI), led by Jean-Luc Mélenchon, have demanded Macron's resignation. LFI MP Eric Coquerel called Barnier's censure the "death knell of Emmanual Macron's mandate." 

Le Pen said that she wasn't pushing for Macron's resignation. "The pressure on the president will get greater and greater," she said. "Only he will make that decision." 

"The leaders of the two main parties on the far right and on the far left didn't have any interest in playing this game," Gérard Araud, a distinguished fellow at the Atlantic Council's Europe Center and a former French ambassador to the US, said. "Both wanted to go to a crisis in the hope of obliging Macron to resign." 

Macron dismissed demands for his resignation as "political fiction." He aims to avoid calling fresh legislative elections before the end of his term in 2027, Bloomberg reported, citing an official close to Macron. 

French Government Collapses Sparks Fiscal Stability Fears

The government’s collapse, however, has raised concerns about France's fiscal stability as the country grapples with a deficit projected to hit 6.2% of GDP this year, more than double the 3% deficit ratio limit required by the European Union. 

French GDP growth is projected to slow from 1.1% in 2024 to 0.8% in 2025, weighed down by fiscal adjustments but offset by easing monetary policy.

Public debt is expected to reach 112.7% of GDP in 2024, driven by high primary deficits and rising interest payments, according to European Commission projections. The government's plan to reduce this ratio by 5.1% next year is considered unachievable. 

Economic forecast for France, Indicators 2024-2026, Source: European Commission  

"All this plunges France into an exceptional crisis as the country faces stark challenges, with a public debt that has increased by more than half in seven years," Rama Yade, a senior fellow with the Atlantic Council's  Europe Center, said. 

France has witnessed "an increase in factory closures, and a foreign trade deficit of around one hundred billion euros in 2023—a sign of an accelerated deindustrialisation of the French economy," Yade added. 

French Government Collapse Sparks Market Volatility

Concerns over France's political and financial stability weighed heavily on French markets in the days leading up to the no-confidence vote. The French stock market suffered losses on November 27, with the CAC 40 index sliding 1.3% and hitting its lowest since August. 

Shares of BNP Paribas SA BNPQF  fell as much as 3% to a six-month low and down more than 11% year to date. Meanwhile, on the same day, the insurance company AXA AXAHY's shares slid 4.3%, and Credit Agricole CRARF fell 1.3%.

In bond markets, concerns over France's political and financial stability have pushed the spread between French and German 10-year government bond yields, a key risk indicator, to 86 basis points, the widest spread since the eurozone sovereign debt crisis of the early 2010s. The rising spread underscores investor caution over France's fiscal trajectory.

Spread France 10Y vs. Germany 10Y, Source: Market Watch 

The collapse of Barnier's government "after just three months highlights the extent to which France's highly fragmented political landscape can paralyze budget policy implementation," Fitch Ratings said. "Continued deadlock in the National Assembly and prolonged policy uncertainty could also weigh on consumer and business sentiment."

France will release its business confidence data on December 19. It is forecast to fall to 89 from 97, according to data on Trading Economics. 

French Markets Rebound, Showing Modest Response 

Despite Michel Barnier’s government’s fall, French markets rebounded, with CAC closing at 7,480 on December 9.

CAC 40 Index, June 2024 – December 2024, Source: Market Watch 

Since the vote of no confidence, BNP Paribas gained 6.9%, Credit Agricole rose 5.52%, and Societe Generale climbed as much as 10.4%.

Analysts suggest the modest market reaction indicates that investors had largely priced in the vote's outcome earlier in the week. Still, the ongoing political uncertainty has elevated borrowing costs, with French borrowing costs rising above Greece’s for the first time.

French Government Collapse Impacts Eurozone

France's instability adds to mounting pressures across the eurozone, including Germany's struggling auto sector and heightened trade tensions with the United States, adding to the eurozone's uncertain economic outlook.

The euro has weakened amid the uncertainty, with EUR/USD slipping to a one-year low, trading around 1.05 on December 10. Following the U.S. election, the EUR/USD slid to a one-year low on November 22 at 1.0412.

EUR vs. USD, 5 December 2024, Source: European Central Bank 

Monex Europe senior exchange market analyst Nick Rees said he was "amazed the euro hasn't moved much." 

"There are two major powers in Europe, France and Germany, both of which right now are emasculated," Rees said.

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