(Bloomberg) — The far-right National Rally indicated in the strongest language yet that it could topple the French government as soon as this week, hours after Finance Minister Antoine Armand said his administration wouldn’t be blackmailed.
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Marine Le Pen and her party have threatened to support a no-confidence motion unless Prime Minister Michel Barnier tweaks his 2025 budget to index pensions to inflation among other asks. Le Pen told Barnier he needs to make the changes by Monday, which is when opposition lawmakers are expected to initiate the process to call the vote of no-confidence.
Even though Armand told Bloomberg Television in a Sunday interview that “the French government doesn’t take ultimatums” and that “we won’t be blackmailed,” National Rally President Jordan Bardella increased the rhetoric early Monday.
“The National Rally will activate the censure vote unless of course there is a last minute miracle,” Bardella told RTL radio. “If Barnier changes his text between now and 3 p.m., but I’ve got little hope he’ll see the light given we’ve been ignored and scorned for several months.”
French equity index CAC 40 sank 1.1% on Monday, with banking shares among the biggest drops. The CAC is a rare developed-market underperformer in 2024, down 5% so far this year, a consequence of political turmoil.
Bond investors have punished France’s sovereign debt relative to its peers amid the political brinkmanship in Paris, pushing borrowing costs at one point last week as high as Greece’s and leading Barnier to warn of a “storm” in financial markets. The political difficulties and market jitters began in June when President Emmanuel Macron called snap elections in a bid to bring clarity in a National Assembly where his party was already short of an outright majority.
Le Pen, who heads the single biggest party in the National Assembly, already scored a victory last week after Barnier agreed to abandon raising taxes on electricity, one of the National Rally’s key demands. This emboldened the far-right party to add to its demands. A no-confidence vote could happen as soon as Wednesday.
The euro slipped as much as 0.8% to around $1.0496.
“The French political turmoil is certainly not helping the euro,” said Rodrigo Catril, strategist at National Australia Bank Ltd. in Sydney. “An actual collapse of the government via a successful vote of no confidence would add another layer of uncertainty.”
Barnier’s budget legislation, which incorporates €60 billion ($63.5 billion) of adjustments, is an attempt to bring order to France’s fiscal situation, with the country’s deficit expected to reach 6.1% of economic output this year.
Budget Minister Laurent Saint-Martin told Le Parisien newspaper over the weekend that requests to amend the budget would cost nearly €10 billion and that the government wouldn’t make any further concessions.
Le Pen lashed out at the comments, telling the AFP newswire that Barnier’s administration “has put an end to discussions.” She has made clear that if her red lines aren’t met then her party will join with the left to topple the government. National Rally President Jordan Bardella accused the government of putting its very existence at risk “out of stubbornness and sectarianism.”
The far-right party’s increasingly combative stance has encouraged investors to bet that Le Pen is preparing to push out the government.
The yield premium between 10-year government bonds and safer German equivalents, a closely watched gauge of risk, recently touched 90 basis points — the widest since 2012 — before tightening back to around 83 basis points on Monday. France’s benchmark equity index is on track for its worst year relative to European shares since 2010.
France’s 10-year bond yield last week briefly matched Greece’s, a country once at the heart of the European sovereign debt crisis. Armand dismissed the comparison, saying France’s economy is solid.
“Greece has done an incredible job after the crisis to reduce public spending,” he said. “But France is not Greece. France’s economy is not Greece’s economy.”
What Bloomberg Economics Says…
“Getting the budget through parliament and the survival of Prime Minister Michel Barnier’s cabinet will likely depend on the decisions of far-right politician Marine Le Pen.”
—Antonio Barroso, Eleonora Mavroeidi. For full insight, click here.
Macron’s gamble with a snap election left the lower house split into three fiercely opposed blocs: a diminished center supporting the president, a leftist alliance and a strengthened far right led by Le Pen. With no coalition possible, Macron appointed Barnier prime minister in September with a core mission to get France’s messy finances in order.
Even before the political turbulence of the last several weeks, France’s finances were a growing concern for investors as plans to reduce debt slipped off course at the end of 2024. With tax revenue far below estimates, the government now expects the budget deficit to reach 6.1% of economic output this year instead of declining to 4.4% as initially planned.
Barnier’s 2025 budget aims to narrow the gap to 5% with shock therapy of €60 billion of tax increases and spending cuts. In the interview, Armand insisted that wavering on the commitment to reduce the budget deficit toward 5% in 2025 and toward 3% to in 2029 was “not an option.”
“What’s my responsibility as a finance minister is to commit to the 5% target that we decided to have at the beginning of our mandate, not only for France or for the government because it’s now needed in order that Europe stills remains a continent of prosperity,” he said.
There aren’t precedents for a government collapsing so close to the end-year deadline for a budget. Still, lawmakers and legal experts have pointed to emergency measures that could permit the state to collect taxes and decrees to authorize minimal spending in order to avoid a shutdown.
“We need to give a sign that we are regaining control and it’s true that with a vote of no confidence we’re entering a phase of uncertainty,” France’s state auditor Pierre Moscovici said on France 2 television Monday. “Our financial situation is dangerous, worrying.”
The National Rally has said it would support such an outcome, while ministers have warned it could inflict harmful austerity and impair efforts to repair finances. Le Pen also played down the consequences of having no budget by end year, telling the newspaper La Tribune that “the French system is well designed, and there’s absolutely no reason to panic, because nothing is definitive.”
If Barnier is evicted from office, Macron would have to re-appoint him or pick a new premier. But the president would face the same difficult balancing act with no possibility for fresh legislative elections until July.
Any new government that emerges would still need urgently to propose a 2025 budget.
Armand sought to reassure investors, saying he’s confident France will continue to reform its economy and attract investors.
“France is committed to keep this European leadership with Germany, with Italy, with Spain, with all European countries so that this growth agenda could be the best answer to the international and trade tensions that are going on now,” he said.
–With assistance from Constantine Courcoulas, Julien Ponthus, Phil Serafino, Ania Nussbaum, Benoit Berthelot, Ruth Carson and Jenny Che.
(Updates markets in the fifth paragraph.)
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