As France prepared for deepening political turmoil after a parliamentary vote on Wednesday that toppled the government, one thing was clear: The paralysis risked unleashing a fresh wave of distress across one of Europe’s biggest economies.
Business leaders, who had been grappling with uncertainty for months, say they are bracing for a hit to growth. Unions warn of widening layoffs. Thousands of civil servants, including teachers, hospital staff, airport employees and workers in the gas and electricity sectors, are planing street protests across the country for Thursday.
France’s economy was already in a rough patch when a deeply divided Parliament backed a vote of no-confidence in Prime Minister Michel Barnier, ousting him and his cabinet and leaving the country without a functioning government or a budget for next year to rein in France’s troubled finances.
Mr. Barnier is likely to remain as a caretaker until President Emmanuel Macron appoints a new prime minister, and France will use the 2024 budget until a new one can be assembled. In the meantime, the government’s collapse “will make everything more serious and more difficult” for France, he said in a speech to Parliament before the vote.
“At a time when economic growth in France is slowing markedly, this is bad news,” said Charlotte de Montpellier, the chief economist for France at ING bank.
High energy costs and interest rates, a downturn in domestic industry, falling consumer confidence and a slowdown in business investment have left growth largely flat for the last two years. Political instability since Mr. Macron dissolved Parliament in the summer and held snap elections that led to a more deeply fractured legislature caused businesses to further pause investment and hiring.
The schism on Wednesday risks ushering in “a new period of instability,” said the Confederation of Small and Medium Enterprises, which represents the bulk of French businesses that make up the backbone of activity.
“A France without a budget would open the door to a debt crisis, the consequences of which would hit economic players hard,” the group said.
The turmoil heralds a somber chapter for France, a cornerstone of Europe’s euro currency union. France has long been an engine of growth alongside Germany, but both countries have been steadily weakened since 2021 by Europe’s energy crisis and high interest rates, turning them from leaders of the bloc into laggards.
But in recent months, fiscal troubles have piled on France’s problems. The country has been grappling with a ballooning debt and deficit, the result of unbridled government spending by Mr. Macron since pandemic lockdowns. That has fueled the concerns about the country’s creditworthiness by investors who have pushed France’s borrowing costs above those of crisis-scarred Greece.
Signs of trouble were piling up before the vote on Wednesday, with a wave of layoff announcements sweeping through the economy.
Energy-dependent companies, including Michelin, a global maker of vehicle tires, and Vencorex, a leading chemical maker, said last month that they would curb production and shed thousands of jobs. Nexity, one of France’s biggest construction firms, said this spring that it would slash nearly 1,000 jobs after high interest rates hit real estate. Auchan, a major supermarket retailer, announced one of its biggest reduction plans ever last month as consumers hit by high inflation curbed spending.
The job market uncertainty, coupled with a cost-of-living crisis, has led the French to save rather than spend, taking a further bite out of economic activity. Purchases by French households, already on a steady decline after surging in the wake of pandemic lockdowns, have cooled further, hurting retailers, restaurants and hotels.
In addition, business bankruptcies are soaring after being kept artificially low through government support in the years that followed the lockdowns. Mr. Macron spent more than 150 billion euros doling out state-guaranteed loans that kept many companies afloat. When the bill came due, many were unable to pay.
The problems have started to nudge up unemployment, ending a brief but intense spree of job creation that was largely supported by public spending. The jobless rate, which fell to a 15-year low of 7.1 percent last year, rose to 7.4 percent in autumn.
France’s industry minister, Marc Ferracci, said thousands of additional job cuts were likely in the coming months.
The challenges have only grown as the state of France’s overstretched finances have become apparent. With a deficit that has jumped to 6.1 percent of economic output, from 5.5 percent last year, the country is now in worse fiscal straits than Greece, Spain and Italy. The country’s debt has exploded to more than €3.2 trillion, or more than 112 percent of the country’s gross domestic product.
The deficit had already started to widen during Mr. Macron’s first presidential term, after the Yellow Vest popular uprising in 2018 over a proposed gasoline tax increase set off nationwide protests by people struggling to make ends meet. Mr. Macron unleashed billions in subsidies and stimulus to quell the social maelstrom.
Two years later, Covid hit. Mr. Macron, vowing to do “whatever it takes” to support the French economy, deployed hundreds of billions in spending to help companies furlough workers at 80 percent of their pay, effectively nationalizing a portion of private payrolls to prevent mass unemployment. The government also provided billions in cheap state-backed loans for companies.
Just as the economy appeared to be recovering, Russia’s invasion of Ukraine in 2022 sent energy prices soaring. Mr. Macron authorized another round of major government spending to shield households and businesses.
“Growth was financed through public spending,” said Ms. de Montpellier. But the sustainability of the relief was not addressed, she added. “People knew that it was not going to last forever; now it’s actually the case.”
The government scrambled in February to plug the hole, announcing €10 billion in state spending cuts, followed by a second savings plan in August, while France’s tax revenue had shrunk more than expected from concessions Mr. Macron had pushed for businesses and the wealthy.
Mr. Barnier, the prime minister, then presented a budget blueprint in October seeking to save another €60 billion in 2025 partly through large temporary tax increases on companies and the rich.
But with France’s political and financial situations in limbo, a further downturn appears inevitable, economists said. The European Commission said last month that France’s growth would slow to 0.8 percent next year, from 1.1 percent — but economists now say that looks too optimistic.
“Companies that need to make a budget plan for next year don’t even know the level of corporate tax will be,” said Bruno Cavalier, the chief economist of Oddo Securities. “So you postpone investment, you sit on your hands.”
Patrick Martin, the president of Medef, France’s biggest employers federation, said in an interview before the government fell that businesses were already constrained. “This is already being reflected in less investment and less hiring,” he said.
Just as worrisome is continued fiscal deterioration, as any new government will struggle to push a new bill to mend France’s finances through a bitterly divided Parliament.
“The public deficit will remain high, debt will continue to grow and the next government — whenever that may be — will have an even tougher task to put public finances right,” Ms. Montpellier said.
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