France’s Government on the Brink of Collapse as Budget Disputes Simmer
For the third time this year, the French government faces a no-confidence vote, with Prime Minister Michel Barnier rejecting demands from right and left parties to make further concessions on the country’s budget plans. This comes as the other European nations, including Germany and the UK, are also struggling with budget-related disputes.
The European Commission’s strict budget rules, which require member states to keep a 3% deficit ratio and a 60% debt ratio relative to their GDP, are putting pressure on even the most hawkish EU members. France, Italy, and Greece have long been seen as budget rule-breakers, but Germany, Austria, and the Netherlands are also falling foul of the rules.
The move by Barnier to try to push through his 60 billion euros ($63 billion) of tax hikes and spending cuts via article 49.3 of the French constitution has driven French stocks lower, pushing borrowing costs to highs not seen since the euro zone debt crisis of the last decade. The collapse of the French government could have longer-term ramifications for Germany’s fiscal rules, with opposition leader Friedrich Merz suggesting he would review the once-sacred borrowing rules.
In the UK, business confidence has dropped to the lowest level since the Covid-19 pandemic, and manufacturing has slowed down sharply since Finance Minister Rachel Reeves unveiled her tax-raising plans. The ramifications of a perceived “bad budget” are causing political casualties across Europe, which the region will need to come to terms with for the foreseeable future.
Goldman Sachs has slashed its growth forecast for the euro zone to 0.8% from 1.1% for 2025, citing “upward pressure on long-term bond yields from higher deficits” and “negative confidence effects from elevated geopolitical risks.” The situation has also raised concerns over the stability of Europe, coming at a time when the U.S. is gaining political clarity ahead of President-elect Donald Trump’s re-entry into the White House.