The government led by Bayrou faces the threat of collapse from as early as September 8th, with a budget plan of 44 billion euros rejected by the opposition, potentially leading to a new political crisis following that of 2023.
Unstable Government Faces September Crisis
The countdown has begun. Prime Minister François Bayrou has called for a vote of confidence on September 8th regarding his budget plan focused on 44 billion euros in savings and tax increases. However, the opposition, ranging from socialists to the National Rally, has already announced their refusal. In other words, the government’s fall seems almost inevitable. This would be the second government toppled in less than a year, since Emmanuel Macron’s failed electoral gamble left the National Assembly without a clear majority.
Immediate Market Reactions
Investors did not wait until September to punish the situation. France’s 10-year borrowing rates surged to 3.53%, approaching the peaks reached in March during the post-eurozone crisis period. The gap with the German Bund widened to 0.8 points, a clear signal of distrust. The CAC 40 index lost 1.5% on Tuesday after already shedding 1.6% the day before. French banks, BNP Paribas, Société Générale, Crédit Agricole, were among the hardest hit, experiencing drops of over 5%.
When bonds plummet and stocks follow suit, it’s a sign that trust is eroding across the board.
The Shadow of the IMF and the Italian Specter
Finance Minister Éric Lombard acknowledged the critical situation. According to him, a failed vote could pave the way for IMF intervention if no government subsequently manages to restore public finances. Even more alarming: French rates now converge with those of Italy, a historical symbol of budgetary fragility in Europe. Lombard estimates that France will pay a higher price than Rome to finance itself “within 15 days” if the government falls.
Explosive Budget Plan
Bayrou proposes an unprecedented austerity regimen: freezing state expenditures for a year, reducing two public holidays, and increasing taxes. The goal is to reduce the deficit from 5.8% of GDP in 2024 to 4.6% in 2026, nearing the 3% demanded by Brussels. However, Barclays deems this scenario illusory, projecting a deficit of around 5.5% until 2026. In other words, the markets fear that Paris may be unable to restore its budgetary credibility.
The Risk of Prolonged Stalemate
A change in Prime Minister would not solve anything: the parliamentary configuration remains unmanageable. According to Axa IM, even a new government would be doomed to impotence. Early elections, on the other hand, could lead to a majority for the National Rally. For the markets, the equation is simple: more instability, less fiscal discipline, and thus French debt dangerously edging towards the red zone.
Impact on Euro and Global Markets
The political shock has already weighed on the euro: it lost 0.8% against the dollar on Monday before sluggishly recovering on Tuesday. Analysts now wonder: will this French stress remain a local issue or will it contagion the entire eurozone? If instability persists, confidence in the European recovery, already weakened, could be severely compromised.
An unstable France shakes all of Europe, causing global markets to be on edge. The convergence between French and Italian rates, unseen since the global financial crisis, indicates that France is no longer seen as a safe haven. Bondholders face an increased risk of sovereign rating downgrades. Stock traders may witness the end of the much-touted European revival underway.
