A fiscal and political crisis is brewing in France over mandated debt brakes. Marine le Pen threatens to collapse the government.
Greek Bond Milestone
EuroNews reports Greek Bonds Mark Historical Milestone Against France.
During the darkest days of the eurozone sovereign debt crisis, Greek 10-year bonds yielded nearly 40 percentage points, or about 4,000 basis points, more than France’s government bond, as the hellenic country teetered on the brink of default, weighed down by a debt burden exceeding 175% of the gross domestic product, severe austerity measures, and the spectre of a “Grexit.
Fast forward twelve years, Greece has rewritten its economic narrative, with its government bonds narrowing the gap to France’s, marking a remarkable turnaround for the former poster child of the Eurozone’s debt crisis.
As of late November, Greece’s 10-year sovereign bonds yielded below 3%, aligning with the yield on France’s OAT bonds. In effect, investors now receive identical compensation for lending to Greece as they do to France.
Prime Minister Michel Barnier’s government is grappling with public backlash over a contentious €60bn spending-cut proposal, which Marine Le Pen’s National Rally opposes.
With parliamentary elections potentially looming next July, political stalemates risk paralysing fiscal reforms.
Goldman Sachs analyst Alexandre Stott noted the difficulty of reducing France’s budget deficit from 6.1% of GDP to the government’s 5% target, describing it as “a tall order.” Stott added, “We expect the debt-to-GDP ratio to rise to 118% by 2027, given the scale of the proposed consolidation and the reliance on tax increases.”
Political fragility further complicates France’s fiscal consolidation efforts. “The lack of political capital and limited fiscal headroom will likely constrain France’s ability to tackle structural reforms in the near term,” Stott warned.
According to Eurostat’s latest Autumn Economic Forecast, Greece’s economy is projected to grow by 2.3% in 2025, up from 2.1% in 2024, reinforcing its position as one of the eurozone’s most dynamic performers. By contrast, France’s economic growth is expected to slow to a modest 0.8% in 2025, down from 1.1% in 2024, highlighting the challenges facing Europe’s second-largest economy.
This divergence also extends to fiscal trajectories. Greece’s public debt-to-GDP ratio is forecast to decline significantly, from 153.1% in 2024 to 146.8% in 2025 and 142.7% in 2026, reflecting ongoing fiscal consolidation.
Meanwhile, France’s public debt is set to rise steadily, increasing from 112.7% in 2024 to 115.3% in 2025 and reaching 117.1% by 2026.
No Confidence
Reuters comments on French Borrowing Costs
Far-right and leftist opposition parties have been threatening to bring down Barnier’s government over its budget that includes 60 billion euros ($63 billion) in tax hikes and spending cuts.
Bond investors worry that the collapse of the government would mean any effort to cut borrowing is jettisoned.
French debt is historically elevated at 112% of GDP and rising. The state has spent heavily in response to the shocks of COVID-19 and the Ukraine war, while tax receipts have lagged expectations.
“Even if the government did achieve its planned consolidation, France would still have a pretty elevated budget deficit,” said Max Kitson, rates strategist at Barclays.
“If you look at Greece’s debt-to-GDP profile, you have a downwards trajectory which contrasts with France’s upwards trajectory.”
Le Pen Gives French Prime Minister Until Monday
Le Monde reports “It’s Thursday. He has until Monday”
The Prime Minister acted on Thursday to withdraw two of the four measures that the RN is demanding be abandoned in the draft finance bill. A step backwards that the leader of the extreme right considers insufficient to “Le Monde”.
Do better. And differently. This is the message, in essence, addressed by Marine Le Pen to Michel Barnier after the Prime Minister’s announcements backtracking on two provisions of his draft budget: the increase in the electricity tax and the end of exemptions from employer contributions for low wages.
“There are still difficulties. It’s Thursday. He has until Monday [December 2]
“ , warns the leader of the far right to Le
Monde .
What Happened?
French president Emmanuel Macron called snap elections and his center coalition collapsed.
I commented on this on July 7 in France is Now Ungovernable Following a Pyrrhic Victory for the Left-Green Alliance
I did not expect National Rally to win a majority, but nor did I expect a third place finish. This is a terrible outcome for both Macron and France.
Macron’s Ensemble coalition currently has 249 members of the National Assembly. After this “win” Ensemble will have 150-170 seats.
Macron will come to regret the elections.
In four words, I can describe the actual result of Macron’s “success” at keeping the Right out of power: France is Now Ungovernable.
Debt Brakes and Treaty Requirements
For additional details and discussion, please see Debt Brakes and Treaty Requirements About to Smash the EU.
Hoot of the Day
To achieve a government debt-to-GDP ratio of 60 percent, EU countries will have to reduce spending or raise taxes by 2 percent of GDP, on average, every year for 46 years.
That also presumes no recessions or other emergencies in that timeframe. And this is supposed to be a serious proposal.
Let’s just say it’s not going to happen.
Also see Debt Brakes and Treaty Requirements About to Smash the EU
The EU has launched an Excessive Debt Proceeding against France. It won’t stop there.
Understanding French Government
The president is the national leader but much day-to-day happenings are in the hands of the prime minister.
After the election fiasco, Prime Minister Gabriel Attal resigned and Macron replaced him with technocrat Michel Barnier who is now in the hot seat.
French Political Crisis
Politico discusses the French Political Crisis.
Marine Le Pen’s far-right National Rally is threatening to pull the plug on the fragile coalition government led by Prime Minister Michel Barnier over the conservative grandee’s plans to rein in the massive French deficit.
In a dramatic move, Le Pen gave Barnier until Monday to answer her demands and amend his government’s budget plans.
Barnier made it clear from day one that his priority was to bring down the French budget deficit, the difference between the amount a country spends and the amount it brings in.
France spent massively to keep the economy afloat during and after the pandemic, which caused the deficit to spike to 5.5 percent of gross domestic product in 2023, prompting the European Commission to place France under what its calls an “excessive deficit procedure” — closer scrutiny that can culminate in sanctions if targets aren’t met.
The Commission requires eurozone members to limit their deficit to a maximum of 3 percent of GDP to guard financial stability and remain in the good graces of creditors.
With the 2024 deficit projected to come in at 6.1 percent, Barnier and his team quickly got to work to submit a budget aimed at getting France’s finances back on track.
The budget Barnier proposed included a staggering €40 billion in cuts and €20 billion in tax hikes for 2025 projected to help bring the deficit down to 5 percent of GDP. While the plans have appeased Brussels, on the whole they’re unpopular domestically.
Barnier is likely going to have to use a constitutional backdoor to pass his budget, Article 49.3 of the French Constitution. The measure allows the government to enact legislation without a vote in the National Assembly. However, lawmakers are allowed to respond by putting forward a motion of no confidence.
Members of the New Popular Front, still furious over Macron’s decision to spurn their chances at governing, have already vowed to do so.
The big question is what Le Pen will do. If the longtime far-right leader and her party back it, the motion would have enough votes to pass, and Barnier’s government would be no more.
The decision carries some risks for her though. Since taking the reins of the party from her father more than a decade ago, Le Pen has assiduously worked to clean up its image and portray the National Rally as a responsible force ready to take the reins of government — not burn the house down.
And with no elections in sight, it’s unclear how exactly Le Pen intends to capitalize on the move politically — Macron cannot call new elections until the summer, as French law only allows the president to dissolve parliament once every 12 months.
The move would almost certainly be popular with the National Rally’s base. An Ipsos poll released on Sunday showed that two-thirds of National Rally supporters were in favor of the motion of no confidence — and 53 percent of respondents on the whole.
Could this just be a negotiating tactic?
… Maybe. Barnier and Le Pen are definitely trying to rally support in public as they continue to negotiate in private.Le Pen and the National Rally want the Barnier government to accede to their demands on issues relating to purchasing power and immigration. They want Barnier to scrap a proposed electricity tax hike and not to delay the inflation adjustment for pensions. They also want to see cuts to the running costs of the public administration and to medical aid for migrants.
What happens if the government falls?
It’s not exactly clear. In the immediate term, the budget won’t be approved.Don’t expect a U.S.-style shutdown that would paralyze the country’s administration, though, as the French constitution provides for at least two stopgap solutions. The first allows the government to put forward a so-called “special law” allowing the state to effectively carry over the previous year’s budget for a few months.
The second option is more complicated, but would see the parliamentary debate continue until Dec. 21 and then allow the government to adopt the budget via a government order. Barnier would still expose himself to a no-confidence vote, which he’d most likely lose, but the budget would be adopted.
Wait — Le Pen’s on trial, right? Does that have anything to do with it?
Not according to her.For the last two months, French prosecutors have been trying to convince a judge that Le Pen and many other current and former National Rally officials illicitly used money from the European Parliament that was intended to pay for European parliamentary assistants, and instead diverted it toward domestic party work.
The case has dogged her for years in Brussels without impacting her political success back home, but that could be about to change. Prosecutors have presented a seemingly airtight case against Le Pen and her co-defendants — all of whom have professed their innocence — and have asked the judge to hand down fines, prison sentences and temporary bans from running for or holding public office for all the accused, with penalties calibrated to their respective levels of involvement in the alleged scheme.
The harshest punishment was saved for Le Pen: a five-year prison sentence, three years of which would be suspended, a €300,000 fine and a five-year ban on running for public office — including the presidency.
After learning on Wednesday that the judge will a deliver a verdict on Mar. 31, Le Pen told reporters that her party’s line on the budget has nothing to do with the trial.
Pyrrhic Victory Proclamation
Let’s circle back to my July 7 in France is Now Ungovernable Following a Pyrrhic Victory for the Left-Green Alliance
Be Careful of What You Wish
If National Rally achieves an outright majority, Jordan Bardella will emerge as Prime Minister.
Then what? The EU will immediately enforce debt and deficit rules it let France ignore for decades.
Under French two-round election rules, if no one gets over 50 percent in round one, any party that gets 12.5 percent of the vote makes it to round.
As typical in France, all but the lead or second place party drop out of the election so the Right faces a single opposition candidate.
These shenanigans kept Marine le Pen’s National Rally party out of power although her coalition is the largest in the French Parliament.
Neither le Pen nor the far left parties accept Prime Minister Barnier’s proposal. The Left wants to collapse the government and if le Pen goes along, consider it done.
Losing was winning. Had le Pen’s National Rally won the election, this budget crisis would be hers. This is why I stated “be careful of what you wish”.
Le Pen should be grateful Barnier is the one who has to make the budget work.
A similar setup applies today. Does le Pen want to take the heat for collapsing the government after trying so hard to improve her radical image?
Looking Ahead
I see almost no chance France can meet the fiscal budget rules of the EU.
On top of it all, Trump wants the EU to increase military spending and European Commission President Ursula von der Leyden is still sticking with nonsensical green energy mandates.
Three years ago le Pen commented “I want France to leave NATO’s unified military command. I will never agree that our troops are subordinate to the NATO command or the European command. France should return to the status in the alliance that it had from 1966 to 2009,”
She has since walked backed some of those statements, but I rather doubt her views have really changed.
Expect fireworks on the budget, green energy, NATO, and Trump’s tariff threats, whether lawfare keeps le Pen out of power or not.
A deep EU crisis is about to boil over.
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