When Prime Minister Michel Barnier unveiled his deficit-reduction plan in October, promising to bring that figure down to 3% of GDP in 2029, he seemed to hope he’d be able to steer the French economy into calmer waters. The country’s prognosis for this year’s public deficit had just jumped from around 5 to over 6% of the country’s gross domestic product (GDP). A rise that remains unexplained until today.
But an imminent no-confidence vote in parliament could now upend Barnier’s hopes — and unleash an economic storm.
It comes after Barnier linked the vote on a part of the 2025 budget — a first step to get the deficit on track to comply with the European Union’s fiscal rules — to a special constitutional vehicle, which only allows for bills to be stopped through a motion of censure.
The prime minister lacks a majority in parliament and is heading a coalition government comprising President Emmanuel Macron’s Renaissance party and the conservative Republicans after snap parliamentary elections in July. Macron called those elections after his party came second in June’s EU parliamentary elections, receiving less than half as many votes as the far-right National Rally.
But what seemed to be Barnier’s only way of getting the budget through parliament is now likely to backfire, with both left-wing and far-right parties vowing to vote the government out.
Underlying weakness of the French economy The latest crisis comes at a time when some of the economic indicators have been relatively stable. French GDP is predicted to grow by 1.1% this year – whilst Germany’s GDP is expected to shrink by 0.2%. Unemployment stands at 7.4% – which is relatively low for France. Inflation has gone down to about 2% from 5% a couple of years ago.
But for Denis Ferrand, head of Paris-based economic research institute Rexecode, these relatively good figures can’t hide the fact that the French economy has gotten weaker over the past few years.
“French – and European – companies have become less competitive with Chinese ones, as our production costs have risen by 25% since 2019. They only went up by three percent in China over the same period,” he told DW.
Ferrand puts that down to years of high inflation, interest rates and energy prices, especially after the start of the Russian invasion of Ukraine in February 2022, which he said had left “a lot of prudence in the air.”
“We do a quarterly survey amongst bosses of 1,000 French small and medium-sized companies about their investment behavior and, in October, only 36% of them were planning to maintain their investments with 45% saying they’d postpone them and 18% wanting to cancel them,” Ferrand said.
“That trend started to emerge since the beginning of the year, but it really gained traction since July’s snap parliamentary elections,” he added.
A mid-November survey by UK consultancy Ernest & Young (EY) amongst 200 international company bosses yielded similar results: roughly half of those questioned had downsized or postponed their investment projects. That comes after France led EY’s investment attractiveness survey in Europe ever since 2019.
French Prime Minister Michel Barnier’s government faces a no-confidence vote on WednesdayImage: STEPHANE DE SAKUTIN/AFP The number of bankruptcies is on the rise Philippe Druon, bankruptcy and restructuring lawyer at Paris-based law office Hogan Lovells, confirms investors are reticent.
“It’s very difficult to find buyers for companies that have gone into administration. I currently manage 60 such cases, which is a lot,” he told DW adding that the number of bankruptcies was as high as during the 2008 financial crisis.
About 65,000 companies are expected to file for insolvency this year – compared to 56,000 last year.
Druon thinks the rise is only partly down to a catch-up effect.
“Many companies now have to pay back loans that the government handed out during the COVID-19 epidemic, but there are also structural reasons such as the transition to electric cars and the fact that there’s less demand for office space as many employees now choose to work from home,” he said.
“What’s more, interest rates on the capital market have been relatively high which makes investing in companies less appealing,” he added.
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Could France slide into a financial crisis? And yet, Anne-Sophie Alsif, chief economist at Paris-based consultancy BDO, says these factors on their own wouldn’t make for a dramatic economic situation. The political factor does though.
“Our macroeconomic figures were about to improve, but if the government falls now and no tailor-made 2025 budget gets voted through parliament, we’ll be sliding into an economic crisis – it would be catastrophic,” she told DW.
“We would signal to investors that our country is incapable of implementing a deficit-reduction plan,” Alsif stressed.
If the government gets voted out, it’s likely the 2024 budget will be replicated in 2025.
“But that was the budget that increased our deficit to over 6%,” she said.
“Macron’s decision to dissolve Parliament was a monumental mistake. We are now forced to govern our country through coalitions, but we’re incapable of that and thus facing an extremely unstable political situation,” she added.
Just like Germany, French carmakers are facing intense competition from Chinese rivalsImage: Eliot Blondet/MAXPPP/dpa/picture alliance Still some investor confidence Christopher Dembik, investment advisor at the Paris subsidiary of Swiss-based Pictet Asset Management, though, qualifies Alsif’s statement.
“It’s exaggerated to say France is on the brink of a financial crisis. That would mean the country wouldn’t be able to refinance its debt, like Greece from 2009 on, and markets aren’t indicating that right now,” he told DW.
“Managers of US investment funds have been telling me that they’ve already taken into account France’s political risk in their calculations and France’s current spread – the gap in interest rates for 10-year government bonds compared to those issued by Germany – amounts to 0.8 percentage points which is more than acceptable,” Dembik stated.
France currently pays interest rates of about 3% on these bonds.
But the country recently, for the first time in history, paid a higher rate than Greece. And up until July’s snap elections, the spread only stood at 0.5 percentage points.
That has economist Ferrand fearing that France might not be able to avoid a financial crisis.
“Paris has always been relying on the fact that it’s too big to fail for other European countries,” he said. “But people in Brussels are starting to lose patience with our apparent incapacity to bring down public debt.”
French public debt now exceeds French GDP.
Edited by: Nik Martin
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