Executive Summary
The Story So Far
Why This Matters
Who Thinks What?
The collapse of the French government under Prime Minister Sébastien Lecornu has triggered growing concerns across the European Union regarding potential impacts on the eurozone’s economic growth and the ongoing negotiations for the bloc’s €2 trillion long-term budget. The crisis stems from persistent disagreements within a hung parliament over national fiscal discipline, following a recent credit rating downgrade for France.
Political Instability and Economic Repercussions
The government’s collapse occurred on Monday morning, less than 24 hours after its ministers were announced, leaving it in caretaker mode. This event marks President Macron’s fifth prime ministerial change since May 2022, underscoring a period of sustained political deadlock in France.
The immediate economic fallout in France has manifested in a decline in stock prices and an increase in bond yields. This follows Fitch’s recent downgrade of France’s credit rating to A+ due to concerns about the country’s ability to reduce its budget deficit, currently at 5.4% of GDP, to the EU-mandated 3%.
Upcoming rating updates from Moody’s and Standard & Poor’s are anticipated in the coming weeks. Philipp Lausberg, a senior policy analyst at the European Policy Centre, noted that further downgrades could lead to additional yield and spread increases, potentially hindering growth not only in France but across the EU, given France’s status as the bloc’s second-largest economy.
Broader EU Concerns
Despite relatively muted immediate market reactions, EU officials and analysts like Lausberg are closely monitoring the situation. They suggest that a swift stabilization of the French political landscape could minimize cross-border economic repercussions, with current market calm attributed to trust in the eventual emergence of a stable French government.
However, a prolonged crisis raises concerns that France’s capacity to engage effectively in crucial EU reforms and policy-shaping could be compromised. This is particularly relevant amidst a challenging geopolitical environment and increasing global competition from powers like Washington and Beijing.
Impact on EU Budget Negotiations
The political turmoil in Paris could also complicate negotiations for the EU’s next seven-year budget, known as the Multi-annual Financial Framework (MFF), which will commence in 2027. The European Commission has already proposed a €2 trillion budget, aiming to reallocate funds towards new priorities such as defense and competitiveness.
Member states have indicated reluctance to increase their budget contributions, making MFF negotiations inherently difficult. Lausberg highlighted that a prolonged French crisis could slow down these negotiations, as a government in flux would struggle to commit strongly or adopt a decisive stance, impacting the certainty vital for economic actors.
Current Political Landscape in France
President Macron has tasked Prime Minister Lecornu with leading negotiations by Wednesday evening to establish a “platform of action and stability” for a new government. This effort is unfolding amid growing calls for Macron’s resignation, which have now extended from the far-right and far-left to include figures from the political center, such as former Prime Minister Edouard Philippe.
Macron has stated he will “take his responsibilities” should Lecornu’s efforts to form a stable government fail, underscoring the precariousness of the current political situation.
Outlook
While EU officials currently report no immediate alarm among Eurogroup countries, the long-term implications of France’s political instability on its economic health and its pivotal role in the EU’s policy direction remain a significant concern. The stability of France’s economy is considered crucial for the overall health and strategic direction of the eurozone.
