French lawmakers will hold a no-confidence vote in Prime Minister Michel Barnier’s fragile minority government on Wednesday, which is expected to pass. Economists warn that the lack of a fresh 2025 budget would set the country’s deficit higher, spur higher bond yields, and deter international investors.
The political turbulence comes as Germany heads for its own no-confidence vote, adding to headwinds for the euro. The situation in France looks “very bad” for international investors, with experts predicting a growing fiscal deficit that will become more expensive to finance as borrowing costs rise.
A caretaker government is likely to present a special constitutional law to effectively roll over the 2024 accounts without spending cuts or tax hikes. However, this would leave the budget bill unpassed, and a last-minute deal appearing improbable.
The fall of Barnier’s government would be bad news for the French economy, with analysts predicting slower growth and higher debt levels. France can count on large reserves of domestic savings to replace international investors, but over-reliance on these funds could become costly in terms of growth dynamics.
In contrast, German economist Carsten Nickel notes that while both countries face political turbulence, Germany’s economic prospects are more challenging due to its need for major adaptation to a new environment and the decline of traditional industries such as car manufacturing.
Source: https://www.cnbc.com/2024/12/04/frances-political-chaos-casts-long-shadow-over-economic-growth.html