France: A Political Crisis But Not (Yet) a Fiscal One
With a parliamentary no-confidence vote having toppled the Barnier administration convincingly, France has no government. This far from unexpected development is a political crisis and one that even without the fiscal cuts that the failed Budget envisaged is likely to mean that the country also faces an increasing economic predicament. But with President Macron able to use so-called ‘special powers’ to fund the government for the time being, France does not (yet) face a fiscal crisis.
Meanwhile Macron is likely to try and nominate a new prime minister but also could resort to a technocratic administration led by a non-political figure. But the irony is that the left and right parties that combined to unseat PM Barnier on the basis of a budget they suggested was too fiscally restrictive may still mean that the electorate will still face a tighter fiscal stance. Indeed, special powers which will probably involve rolling over the 2024 budget will increase effective tax-takes due to a lack of indexing while holding government spending constant in nominal terms implies clear real-term cuts.
Admittedly, it is unclear what this may mean for the budget deficit, but with it likely that debt servicing costs will have to rise, a fiscal hole in the coming year is unlikely to be much different to the 6% of GDP gap seen for this year and thus far above the 5% goal of the Barnier Budget plan.
Regardless, prolonged political deadlock is likely to continue being the order of the day as Macron is likely to resist pressure to step down and call an early presidential election before the end of his term in 2027. Indeed, forming any stable and even minority administration is going to remain complicated further as the three main parliamentary factions are all being driven by the looming 2027 presidential election, most notably far-right Le Pen and far-left leader Jean-Luc Mélenchon. The president is due to address the nation on Thursday night to explain the way forward. But whatever he suggests, it is likely that France may remain in a political impasse until at least next July when new parliamentary elections can then take place. But with the electorate very much sectioned into three factions, a stable government even then is unlikely; after all, three into two does not go! All of which suggest a fiscal crisis or crunch, which may be avoidable for the time being, could occur in H2 next year.