Is the French Government Doomed to Collapse?

The French government is struggling to pass the 2025 budget through a divided parliament, raising concerns among financial institutions, analysts, and markets about the sustainability of the Barnier administration and its potential economic repercussions.

How do we and other experts view the increasing political uncertainty in France? Our senior political analyst Andy Langenkamp provides a short update on the ongoing political drama in the second economy of the EU.

Third-Party Analyses:

• European Commission: In mid-November, the EC projected economic growth of 1.1% this year, with a decline to 0.8% for 2025.
• Moody's Corporation : The credit rating agency warns of a potential downgrade in France's credit rating due to ongoing political uncertainty, likely increasing interest rates and hindering economic growth.
• International Monetary Fund : The IMF expressed concerns about the French economy, emphasizing the need for structural reforms to restore market confidence and ensure sustainable growth.
• OECD - OCDE : The OECD states that the political deadlock in France hampers the implementation of key economic reforms, posing long-term risks to the country’s economic outlook.
• Rabobank : Last month, Rabobank questioned Prime Minister Barnier's ability to address France's fiscal challenges.
• Bruegel - Improving economic policy : The think tank described Barnier’s budget proposal as a “delicate balancing act” but highlighted its vulnerabilities.

Likelihood of Resignation:

• President Emmanuel Macron: Despite waning popularity, with approval ratings hovering around 20%, there are no indications that President Macron plans to resign. The next presidential election isn’t until 2027, and the chances of Macron stepping down are minimal. The only postwar president to leave office early was De Gaulle in 1969, under exceptional circumstances.
• Prime Minister Michel Barnier: The French government faces considerable pressure, particularly over the controversial 2025 budget, which includes €40 billion in spending cuts and €20 billion in tax hikes. The potential invocation of Article 49.3 to pass the budget without a parliamentary vote may trigger a no-confidence motion, potentially leading to the collapse of Barnier’s government. While there are no definitive signs that Barnier will resign voluntarily, the Socialist Party has signaled its likely support for a no-confidence motion against Barnier’s administration. This would result in the cabinet’s downfall, though it would have no direct impact on Macron. The cabinet’s fate depends on whether Marine Le Pen’s RN chooses to back Barnier.

Impact on Financial Markets:

• Bond Markets: Political instability has already led to a rise in risk premiums on French government bonds. Since June, the spread between French and German 10-year yields has nearly doubled to around 0.85 percentage points. Yesterday, spreads reached levels not seen since 2012, with French yields surpassing Greece’s for the first time ever (in 2021, the spread was just 0.20 percentage points).
• Stock Markets: French equity markets are under pressure, with significant losses in the CAC 40 index and sharp declines in the banking sector. Despite this, a Reuters survey of 14 equity strategists conducted from November 15 to 26 projected a nearly 9% rise in the French index by the end of 2025 compared to the survey levels. This would outpace the STOXX600, which is expected to grow by around 5%.
• EUR/USD: Rabobank foresees the euro sliding to parity, partly due to France’s troubles. However, the euro showed resilience yesterday despite the political turmoil. Markets appeared to place greater weight on comments from ECB official Schnabel than on the French drama. A technical analysis on FX Street reflects some uncertainty about further euro weakening: "EUR/USD broke out of its descending regression channel by rising above 1.0520 on Wednesday, and the Relative Strength Index (RSI) climbed above 50, signaling a bullish short-term outlook." Meanwhile, our technical team observes mixed signals. The recent break below the medium-term support zone of 1.05–1.045 last week casts doubt on a neutral medium-term EUR/USD outlook. However, the intraday spike low around 1.033 last Friday, followed by a quick rebound, suggests at least a short-term bottom. A further rise above resistance at 1.061 would confirm short-term bottoming, potentially paving the way for recovery toward the next resistance zone of 1.076–1.08. Nevertheless, the downtrend remains dominant according to Henk-Jan Pijper unless the pair breaks sustainably above this level.