France tumbled further into financial uncertainty on Monday as the government teetered on the brink of collapse, prompting investors to sell French stocks and bonds, which has sent the country’s borrowing costs soaring.
A political showdown over France’s budget could lead to the ouster of the prime minister, Michel Barnier, as early as Wednesday, after he pushed the measure through the lower house of Parliament on Monday without a vote. Opposition parties immediately called for no-confidence vote.
Mr. Barnier’s forced departure would leave the government rudderless, raising questions about the ability of President Emmanuel Macron to manage the fallout.
France has become one of the most financially troubled countries in Europe, with an outsize debt and deficit that have grown rapidly in recent months. But efforts by Mr. Barnier’s fragile government coalition to address the problem, with a budget bill seeking 60 billion euros in savings for 2025, have become snared in a political minefield.
Last week, the French government spokeswoman, Maud Bregeon, said France was facing a possible “Greek scenario,” a reference to the financial tumult that gripped Greece during Europe’s debt crisis a decade ago.
How did France reach this point?
France’s far-right National Rally party, led by Marine Le Pen, called for a censure motion against Mr. Barnier’s government on Monday after making demands for changes to the budget bill.
The maneuvering caps weeks of political wrangling as Mr. Barnier has sought to push a tough austerity budget through Parliament aimed at mending the nation’s rapidly deteriorating finances. The measure involves deep spending cuts and hefty one-off taxes that would fall mostly on the rich and on big corporations.
France is in worse fiscal straits than Greece, Spain and Italy, with a deficit that has jumped to 6.1 percent of economic output, from 5.5 percent last year. The debt has exploded to more than €3.2 trillion, or more than 112 percent of the country’s gross domestic product.
European Union rules require members to have sound finances, including capping debt at 60 percent of economic output and not letting government spending exceed revenues by more than 3 percent.
Wrestling any savings has become politically impossible because of the new makeup of France’s Parliament after President Macron held snap elections in the summer as part of a gamble to help stave off the rise of the far right in the country. Instead, voters ushered in a Parliament that was radically split among warring political factions, which has proved destabilizing to the French government.
What happens if the government falls?
Without a budget, the government will not have the authority to raise taxes as of Jan. 1, limiting its ability to keep its operations running. But France has emergency procedures written into its constitution to prevent a government shutdown. These would allow for minimal tax collection and reduced spending until Mr. Macron can appoint a new government.
The president may decide to bring in a technocratic government in hopes it could last through next June, when Mr. Macron would legally be allowed to call for new elections.
But there is a major risk: Any new prime minister named by Mr. Macron would face the same divided legislature, potentially throwing any new budget negotiations back into the same political doomsday loop.
Should that happen, it could paralyze the government’s ability to pass critical legislation for months. Analysts said Mr. Macron would also have the option of considering whether to resign from the presidency.
“There is no clear political Plan B,” said Bruno Cavalier, the chief economist of Oddo Securities. “We are asking questions that should not even be on the table.”
Will France face a financial crisis?
Investors are punishing France for failing to get its financial house in order. But it is highly unlikely that the country will become as financially precarious as Greece was during Europe’s debt crisis more than a decade ago, as Ms. Bregeon, the government spokeswoman, had suggested.
For one thing, France is a too-big-to-fail economy, with deep savings and an important industrial base and service sector. During the debt crisis, Greece was at the risk of exiting the trade block that uses the euro currency, but France is not.
What’s more, investors had shut Greece out of borrowing in financial markets. Political turmoil has pushed up France’s borrowing costs, but the country is far from being shut out.
The problem for France is that higher interest rates will keep pushing up the interest that it must pay on its debt. That tab is now at least €60 billion a year — bigger than France’s defense budget for 2024.
What are the bigger risks for France?
With no budget resolution in sight, the bigger damage is unfolding in the French economy itself. Without a budget for next year, businesses do not know how much taxes they will have to pay in 2025 and are delaying investment and hiring until there is more clarity.
Consumers are becoming worried that unemployment, which is now at 7.4 percent, may rise, recent surveys show.
“All of that slows the French economy and is a recipe for a recession,” Mr. Cavalier said.
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