The resignation of French prime minister François Bayrou is unlikely to increase financial turbulence across the eurozone, however it is likely to erode confidence, analysts at ING have noted.
Charlotte de Montpellier, senior economist, France and Switzerland, and Michiel Tukker, senior European rates strategist, were commenting following the resignation of Bayrou after he lost a confidence vote in the National Assembly, with 364 MPs stating their opposition to the current government, and only 194 voting in favour.
President Emmanuel Macron, who will accept the government’s resignation on Tuesday, has already announced his intention to appoint a new prime minister in the coming days.
Political agreement
“Some centrist MPs have floated the idea of appointing a ‘negotiator’ to forge a political agreement before naming a new prime minister,” the analysts noted.
“As is the case in other countries such as Belgium, the idea would be to reach agreement on the ‘what’ before the ‘who’. If this option were pursued, it would mean that forming a government and therefore voting on a budget would take a long time. But, with nationwide protests planned for 10 and 18 September, Macron risks becoming the sole target of public anger in the absence of a functioning government.
“In our view, dissolution of parliament is not the most likely scenario in the coming days; the president will first try to find a prime minister who can survive a vote of no confidence. Macron’s resignation is even less likely.”
Budget concerns
Regardless of who is installed as PM, he or she will face budget uncertainty, with a recent Finance Ministry report suggesting that spending will rise by €51.1 billion next year, pushing the deficit to 6.1% of GDP, well above the 4.6% target submitted to the EU.
Corrective action will be necessary to prevent the country’s debt problem from worsening in the coming years – France’s debt burden is forecast to rise from 113% of GDP in 2024 to more than 125% by 2029.
“France’s fiscal problem is primarily due to its ageing population,” the ING analysts noted. “Social protection and healthcare expenditure accounted for 32.3% of GDP in 2023, compared with an average of 27.2% in the eurozone, and this expenditure will only increase naturally as the population ages.
“In addition, France’s potential GDP growth remains very low, at around 1.2%, which is not enough to finance the rising cost of social protection. The problem is all the more acute when GDP growth falls below potential, as is the case this year, with growth expected to average 0.6%.
“In a context where taxation is already high, the equation is complicated and will continue to cause political instability, not only this year, but also in the years to come.”
The analysts added that economic activity in France is “likely to stagnate” in the fourth quarter of this year.
While the impact on the broader eurozone market has been limited to date, a “prolonged escalation could see lower swap rates”, they note. Read more here.
