Since the French government did not survive the December 4 no-confidence vote, there is no government now to pass the budget for next year. Prime Minister Michel Barnier has resigned but will remain in a caretaker position until a replacement is found through political negotiations. This essay discusses the ramifications of the vote, possible next steps for France, and how those choices may affect the EU economy overall.
Key Insights
- France has an urgent need to reduce its fiscal deficit and provide a credible reduction path for its debt in the next four years. Barnier presented a very tough budget (beyond what the European Commission demanded) and was met with strong objections from parties across the political spectrum.
- Given these objections, Barnier opted to use a constitutional measure to pass a social security financial bill, equivalent to using executive orders that bypass parliament. The only opposition that parties in parliament could bring was to demand a vote of no confidence.
- This is the first time in 60 years that a French prime minister has failed a vote of confidence. Though this is a rare event, the French constitution has provisions that ensure the smooth functioning of the state until a political solution is found.
- While this uncertainty adds to an already unfavorable and deteriorating economic environment, this vote of no confidence is not a shock. That said, with the French government occupied with domestic issues, it will not be actively engaging at the EU level, which will delay important decisions on how to promote the bloc’s competitiveness. The European Central Bank (ECB) is expected to continue to reduce interest rates well into 2025, which will reduce pressure on spreads.
How did we get here?
Barnier proposed a budget that was very aggressive in terms of trying to reduce the deficit. France is under the European Excessive Deficit Procedure (EDP), which means the government needs to present a credible path of deficit reduction for the next four years that the European Commission must approve. The budget Barnier presented in Brussels went beyond what the European Commission would demand of France. Domestically, it was met with huge opposition from the Rassemblement National (RN), France’s extreme right, which demanded many changes. The Nouveau Front Populaire (NFP) coalition of the left had equally large objections.
Given all these objections, Barnier opted to use a constitutional measure (article 49.3) to pass a social security financial bill. This is equivalent to using an executive order to try to bypass the parliament’s approval of the bill. The only opposition the parliament can bring is to demand a vote of no confidence. And indeed, Barnier’s efforts backfired, with both the NFP and the RN demanding such a vote. This is the first time in 60 years that a French government has not survived a vote of no confidence, which makes it a big deal, symbolically at the very least.
What happens next?
A vote of no confidence means the president needs to call elections. However, President Emmanuel Macron already opted to call parliamentary elections after his party defeat during the European elections in June 2024, and the constitution does not allow him to call the same elections again for one year (i.e., until June 2025). The European elections outcome did not require him to call national parliamentary elections; this was entirely his choice as he felt that he did not have the mandate to support his presidency.
In the meantime, Barnier will remain in his position in a caretaker capacity until another prime minister can be found before the end of the year. If this does not happen, the constitution provides for a law to be passed in order for the country to operate (i.e., pay bills) under the previous budget. There is no threat of a shutdown.
However, in his appeal the night before the vote of confidence, Barnier argued that if France were to operate under the 2024 budget, the deficit would deteriorate further. This is because no wage indexation would be provided (indexation is not automatic but requires yearly approval, which cannot happen if there is no new government), which necessarily leads to lower tax revenues for 2025 compared to 2024. Expenditures will remain at the same level as in 2024; lower revenues but the same expenditure necessarily means a deficit deterioration.
What are the choices going forward?
The NFP is the largest party in parliament after the June elections and could conceivably demand to fill the prime minister position. They tried this after the June elections but did not receive Macron’s necessary support. It would be difficult for Macron to deny them the position this time around, but a prime minister chosen by the NFP would be quite problematic for him. The policies the left coalition wants to pursue do not help fiscal finances and threaten to reverse some important structural reforms Macron had achieved, including pension reform. If that were pursued, it would be important to watch Brussels’ reaction in view of the new fiscal rules introduced in September. In principle, the EDP allows for fines to be imposed on countries, but this has never been applied.
Macron can instead appoint a technocratic government and wait six months until he can call elections again. He could also theoretically pass the budget by executive order, but no president has ever tried this, and nobody seems to think it is a viable option.
The most important issue for Europe right now is defense, but France faces no imminent threat to its ability to respond effectively in matters of defense if the need were to arise, and in the meantime the 2024 budget will be in operation. However, preoccupied with domestic issues, France will be slow to engage with decisions at the European level, a fact that will delay action on how to promote the EU’s competitiveness.
In the meantime, French spreads (on government bond yields) have recovered a little since the initial increase following the vote. The ECB is expected to reduce interest rates one more time before the end of the year and continue to reduce rates well into 2025. This will further release the pressure on spreads.
Since the French government did not survive the December 4 no-confidence vote, there is no government now to pass the budget for next year. Prime Minister Michel Barnier has resigned but will remain in a caretaker position until a replacement is found through political negotiations. This essay discusses the ramifications of the vote, possible next steps for France, and how those choices may affect the EU economy overall.
Key Insights
- France has an urgent need to reduce its fiscal deficit and provide a credible reduction path for its debt in the next four years. Barnier presented a very tough budget (beyond what the European Commission demanded) and was met with strong objections from parties across the political spectrum.
- Given these objections, Barnier opted to use a constitutional measure to pass a social security financial bill, equivalent to using executive orders that bypass parliament. The only opposition that parties in parliament could bring was to demand a vote of no confidence.
- This is the first time in 60 years that a French prime minister has failed a vote of confidence. Though this is a rare event, the French constitution has provisions that ensure the smooth functioning of the state until a political solution is found.
- While this uncertainty adds to an already unfavorable and deteriorating economic environment, this vote of no confidence is not a shock. That said, with the French government occupied with domestic issues, it will not be actively engaging at the EU level, which will delay important decisions on how to promote the bloc’s competitiveness. The European Central Bank (ECB) is expected to continue to reduce interest rates well into 2025, which will reduce pressure on spreads.
How did we get here?
Barnier proposed a budget that was very aggressive in terms of trying to reduce the deficit. France is under the European Excessive Deficit Procedure (EDP), which means the government needs to present a credible path of deficit reduction for the next four years that the European Commission must approve. The budget Barnier presented in Brussels went beyond what the European Commission would demand of France. Domestically, it was met with huge opposition from the Rassemblement National (RN), France’s extreme right, which demanded many changes. The Nouveau Front Populaire (NFP) coalition of the left had equally large objections.
Given all these objections, Barnier opted to use a constitutional measure (article 49.3) to pass a social security financial bill. This is equivalent to using an executive order to try to bypass the parliament’s approval of the bill. The only opposition the parliament can bring is to demand a vote of no confidence. And indeed, Barnier’s efforts backfired, with both the NFP and the RN demanding such a vote. This is the first time in 60 years that a French government has not survived a vote of no confidence, which makes it a big deal, symbolically at the very least.
What happens next?
A vote of no confidence means the president needs to call elections. However, President Emmanuel Macron already opted to call parliamentary elections after his party defeat during the European elections in June 2024, and the constitution does not allow him to call the same elections again for one year (i.e., until June 2025). The European elections outcome did not require him to call national parliamentary elections; this was entirely his choice as he felt that he did not have the mandate to support his presidency.
In the meantime, Barnier will remain in his position in a caretaker capacity until another prime minister can be found before the end of the year. If this does not happen, the constitution provides for a law to be passed in order for the country to operate (i.e., pay bills) under the previous budget. There is no threat of a shutdown.
However, in his appeal the night before the vote of confidence, Barnier argued that if France were to operate under the 2024 budget, the deficit would deteriorate further. This is because no wage indexation would be provided (indexation is not automatic but requires yearly approval, which cannot happen if there is no new government), which necessarily leads to lower tax revenues for 2025 compared to 2024. Expenditures will remain at the same level as in 2024; lower revenues but the same expenditure necessarily means a deficit deterioration.
What are the choices going forward?
The NFP is the largest party in parliament after the June elections and could conceivably demand to fill the prime minister position. They tried this after the June elections but did not receive Macron’s necessary support. It would be difficult for Macron to deny them the position this time around, but a prime minister chosen by the NFP would be quite problematic for him. The policies the left coalition wants to pursue do not help fiscal finances and threaten to reverse some important structural reforms Macron had achieved, including pension reform. If that were pursued, it would be important to watch Brussels’ reaction in view of the new fiscal rules introduced in September. In principle, the EDP allows for fines to be imposed on countries, but this has never been applied.
Macron can instead appoint a technocratic government and wait six months until he can call elections again. He could also theoretically pass the budget by executive order, but no president has ever tried this, and nobody seems to think it is a viable option.
The most important issue for Europe right now is defense, but France faces no imminent threat to its ability to respond effectively in matters of defense if the need were to arise, and in the meantime the 2024 budget will be in operation. However, preoccupied with domestic issues, France will be slow to engage with decisions at the European level, a fact that will delay action on how to promote the EU’s competitiveness.
In the meantime, French spreads (on government bond yields) have recovered a little since the initial increase following the vote. The ECB is expected to reduce interest rates one more time before the end of the year and continue to reduce rates well into 2025. This will further release the pressure on spreads.
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