Francois Bayrou, the prime minister of France, requested that parliament give him an earlier-than-expected vote of confidence last week. The centrist government’s fallout could be the result of the next week’s ballot, which could also set off a period of unrest in the second-largest economy of the EU.
Bayrou will attempt to secure approval for both his unpopular budget and himself and his government at the Monday vote in the lower house of parliament, the National Assembly. However, opposition parties have stated that they will support him and limit the terms of his government’s term in power.
President Emmanuel Macron, who has pledged to serve until 2027, may soon have to make the difficult decision to appoint a third prime minister in a year following his swift dissolution of parliament in June 2024.
Following Bayrou’s announcement on August 26th, financial markets erupted. On Monday, the interest rates on 10-year bonds increased by 3.5%, more than Greece’s 3.36 percent, which is higher.
What are the budgetary recommendations made by Bayrou?
France’s economy appears to be doing fairly well at first glance. In comparison to Italy, where the government’s debt pile is located, the debt pile is smaller. And the cost of paying the UK’s annual interest rate on its debt is significantly lower.
However, Paris is having trouble regulating its spending. France’s budget deficit, which surpassed its GDP, reached 5.8% (168.6 billion euros, or $ 96 billion) last year. No more than 3 percent of the official EU goal is achieved. Investors are concerned that France’s persistent deficits will lead to ever higher debt ratios and lower its credit rating.
Bayrou’s plan is to reduce the government’s borrowing by 4.6% of GDP in 2026 and by 2.8% by 2029. In turn, that would reduce the overall debt-to-GDP ratio by 127.2% in 2029 from 127.3% if no changes were made.
His strategy calls for savings of 43.8 billion euros ($51 billion) for 2026, 80% of which would come from spending cuts, such as a rise in the public sector’s hiring, a rise in pension indexation, and the repeal of two public holidays.
Other proposals that have been taken into account include higher taxes on high-earners.
Macron’s unpopular 2023 decision to raise France’s retirement age by two years to 64 is supported by the prime minister’s proposals. The president claimed at the time that excessive pension contributions were a financial drag on the nation.
The French leadership has once more attempted to influence the discussion surrounding the country’s future before the confidence vote.
The prime minister’s ouign, not the government’s fate, is the issue, not the question. The question is “the fate of France,” Bayrou said.
Finance Minister Eric Lombard warned on August 26 that there is a risk in front of us unless France is able to control its debt. Interventions from the International Monetary Fund, the world’s top lender of last resort, are typically for emerging market nations.
What responses did Bayrou’s gamble have from other political parties?
The prime minister will need to rely on the support of opposing parties on the left and right to pass his budget because Bayrou’s centrist and allies’ coalition does not have a majority in France’s parliament.
However, opposition parties, which control more than 320 seats in the 577-seat National Assembly, have already declared that they will support Bayrou. The current government would not be able to survive if they continue to do that.
Unbowed lawmakers, who are opposed to a “make the government fall,” have pledged to reject an “unfair budget.” Marine Tondelier, the Greens’ national secretary, called Bayrou’s confidence vote “a resignation de facto.”
Its leader, Olivier Faure, declared that it would oppose the government. Faure said that Bayrou had “chosen to go.”
In another instance, the National Rally’s head, Jordan Bardella, stated that his far-right party would “never vote for a government whose decisions are making the French suffer.” Bardella claimed that Bayrou has actually signaled “the end of his government.”
What has the response of the financial markets been?
Due to political instability, shares of major French companies, including BNP Paribas, Credit Agricole, and Societe Generale, all dropped 8 to 10% last week, raising the cost of government debt (otherwise known as the yield) and lowering the value of those companies.
Continued political conflict has increased the difference between the costs of French and German 10-year borrowing, according to Davide Oneglia, a European analyst at the political research firm TS Lombard.
A crucial indicator of macroeconomic risk, France’s borrowing premium has grown by almost 1 percentage point since the start of this year. France’s 10-year yields are now among the EU’s highest, recently surpassing those of Portugal and Greece.
“The political climate is causing wider spreads]between France’s borrowing costs and those of its European peers.” Oneglia told Al Jazeera, “We’re not yet in a full-blown debt crisis, but the fiscal situation is getting worse.”
Due to pressure on Paris’s tight finances, Moody’s rating agency decreased France’s credit score from “Aa3” to “Aa2” in December. Similar ratings from rival agencies S&, P, and Fitch, which have also downgraded their ratings for France since 2023, are now available with Moony’s move.
What might come next?
Bayrou’s confidence vote, according to the majority of commentators, is likely to result in Macron replacing him with another prime minister. The president hasn’t addressed the budget since holding snap elections last year, which would put him in a bind.
Additionally, it wouldn’t alter the parliament’s arithmetic. Political gridlock appears to be a result because Macron is unlikely to nominate a premier who supports a looser fiscal policy that might win the support of parliament.
In order to reshape the political landscape before France’s 2027 presidential election, some politicians, including Marine Le Pen of the National Rally, have urged Macron to call new legislative elections. However, that choice will be viewed with caution by the French president.
Since last year’s vote, which resulted in the current parliament, there hasn’t been much of a change in voting intentions, according to the most recent opinion polls. In addition, the chances of the National Rally winning the upcoming presidential election are better than ever because the party has consistently led polls for that vote for the past two years. Jordan Bardella, the most likely candidate for the National Rally, was polled at 30 and 31 percent, with the next candidate at 21 percent, according to two polls in May.
Oneglia thinks the 2022 Italian elections will provide a useful blueprint in the event of a National Rally presidential victory. He cited Italian Prime Minister Giorgia Meloni as a reference to Meloni’s right-wing populist party, which “sealed fiscally centrist” when it gained power.
Source: Aljazeera
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