France In Turmoil - Will Barnier’s Government Collapse?

This coming weekend French President Emmanuel Macron will preside over the re-opening of Notre-Dame cathedral, with a number of world leaders present. He may do so against the backdrop of a collapsed government and mini-financial crisis.

This week the protracted budget process of prime minister Michel Barnier was expected to start with the first of three votes (Wednesday 4^th, Friday 6^th and likely December 20^th). Instead, and likely influenced by the mood of the opposition, the government has deployed the unpopular article 49.3 to pass the first part of the budget.

The far-left (LFI) have tabled a vote of no-confidence in the government, which the far-right (Rassemblement) threaten to vote for. If this occurs on Wednesday, the government will collapse and a new (technocratic?) government(s) would be found to shepherd France to the summer (when the next election can be held).

Historically, this is an unprecedented development and the constitution is not clear on the path ahead for the government and the budget. Most likely, the budget will follow the contours of last year’s budget would carry through 2025 (defence is the relative loser here).

While there is a wild card in the process (if the Socialists do not vote for censure then the government remains in place), the issue is Marine Le Pen’s desire to exercise power (she potentially faces the end of her political career in Q1 ’25 when the judiciary pronounce on her corruption case), and her party’s preparation for the next election. In addition, it is believed that her objective is to topple Emmanuel Macron before 2027 (i.e. 2025).

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Le Pen has demanded a series of major changes to the budget – notably on electricity/energy costs and on the inflation adjustment of pensions. Some but not all of these have been forthcoming. The risk to Le Pen from bringing down the government is that she and her party ae blamed for weakening the economy (note that French debt trades more like BBB rated government debt so we do not expect a full blown market crisis) and potentially the security outlook.

Should the government collapse the focus will be on finding a new government – already there is some shift on the Socialist side, and Macron could for example re-appoint Barnier (or Bernard Caseneuve – former pm, or Gerard Larcher and even the governor of the central bank) with Socialist members added to the cabinet (which in turn would upset Le Pen).

There is a scenario where the Barnier government doesn’t collapse or where it is quickly re-constituted with the Socialists (as a broad centrist coalition). Our concern is that given France’s perilous finances, there is no sense from the main parties of the damage this process is doing to France’s reputation and its financial standing. A long period of austerity is ahead, and while we don’t expect a full blown financial crisis, the level of financial pressure on France in the next year or so will be high. Ultimately it also reflects very badly on Emmanuel Macron