When 73-year-old centre-right politician Michel Barnier was appointed French prime minister in September, few expected the man who kept the European Union united during the Brexit era to be gone by Christmas.
Yet that is now a likely prospect. Far-right leader Marine Le Pen’s vow to topple his government over a belt-tightening budget plan that is increasingly unpopular with voters is proving to be more than bluster.
Despite Barnier’s offer of concessions worth billions of euros on everything from electricity taxes to reduced drug reimbursements, Le Pen’s turn of the screw has gone from gradualist to maximalist, and she now says she will back a no-confidence motion over her anti-austerity “red lines”.
These red lines will now likely paralyse whoever governs next. “No French government will enjoy any policy space whatsoever until at least the autumn of next year,” Citigroup economists warned last week.
This is unprecedented and clearly messy territory for the EU’s No. 2 economy. Barring a Christmas miracle, such as a change of heart within the openly anti-Barnier left-wing bloc, France faces the risk of ringing in the New Year without an approved budget or a functioning government.
While President Emmanuel Macron has institutional mechanisms to mitigate the chaos — like a rollover budget and a new or interim prime minister — pressure on financial markets will build as gridlock adds to a high debt and deficit.
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While some will be quietly celebrating a reprieve from planned cost-cutting measures, such as pensioners, Bloomberg Economics estimates that if no fiscal adjustments are made, debt levels could escalate sharply and exceed 120% of gross domestic product by 2027 from around 112%.
To be clear, France isn’t on the brink of a Greek-style crisis or a Five Star-Movement era Italian job; it has strong institutions, the support of European partners and estimated national wealth at EUR20.1 trillion ($28.43 trillion), or 686% of GDP, as S&P analysts flagged last week.
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The European Central Bank’s path of monetary easing should contain the pressure. Yet the level of uncertainty is high and so are the ripple effects for the economy, as seen in the rising spread between French and German bond yields and next year’s total of EUR350 billion of French government debt falling due.
Deteriorating market confidence can delay investment decisions, raise costs for borrowers and crimp growth for everyone.
There’s clearly been a failure of the French elite to acknowledge the unsustainability of public finances, which would theoretically require saving EUR110 billion between now and 2027, the end of Macron’s second term.
The word “crisis,” while bandied around, always felt pretty performative – until now. Across the left-right spectrum, political parties — none of which has a workable majority alone — have failed to come together in the wake of this summer’s snap elections, preferring instead to chip away at Barnier’s budget for political expediency.
The far-right and left parties are even calling to roll back pension reforms in a country where for 14% of GDP funds retirement. Barnier, despite his long Brexit experience, appears to have overestimated his weak hand.
And then there’s Le Pen, who’s showing a dangerous new willingness to ditch her party’s suit-and-tie normalisation strategy — even at the risk of burning her own voters with the ensuing chaos.
She appears to have made the calculation that any crisis will ultimately serve to hasten Macron’s exit and help her electoral chances ahead of a potentially damaging court ruling over alleged misappropriation of EU funds.
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Catherine Fieschi, author of Populocracy, tells me that “disruption has become its own currency”.
Success is not guaranteed: Confidence in political parties has dwindled to 14% from 18% over the last two years, according to Ipsos poll data released on Monday, though Le Pen’s National Rally party has the highest support of the major parties with 37%.
The leaders of Brexit Britain used to say, with little conviction and even less accuracy, “No deal is better than a bad deal.”
A similar sentiment seems to be taking over in France: No budget is better than a bad budget. It’s a misguided one. If there is any opportunity to avoid tumbling into the unknown for a Le Pen red line worth about EUR3 billion, it should be grabbed.
Failing that, the only silver lining of what comes next is the prospect of reality sinking in.
Chart: Bloomberg
