France is bracing for another political crisis. Prime Minister François Bayrou is faced with a vote of no confidence on September 8 over his proposal to trim €44 billion ($51 billion) of the budget. Should he fail, he will be the fourth prime minister in 18 months to fall, underlining the chaos afflicting one of Europe's largest economies. President Emmanuel Macron will need to appoint another head of government to keep the state running, the Wall Street Journal reported.
How debt and politics are linked
France's political instability is also inextricably linked to its financial woes. The nation's debt has grown from €2.2 trillion during Macron's election year of 2017 to €3.3 trillion today. Borrowing becomes more costly and is now approaching that of Italy, a country historically linked with unstable politics and weak finances. Italy has stabilized under Giorgia Meloni, but France is moving toward the same type of dysfunction that has long been the hallmark of Rome and Athens.
Divisions in parliament block solutions
France's National Assembly is split into various blocs with rival agendas. Left-wing movements resist cuts to welfare spending, which contributes to two-thirds of the budget. Centrists and conservatives want higher defence spending without forcing through new taxation. Marine Le Pen's far-right National Rally on the other hand advocates for deficit cutting tied up with immigration and EU contributions. With all this fragmentation, passage of any serious reform, such as the annual budget, becomes a tall order.
Macron's tax bet turns sour
Macron's original policies set the stage for the crisis of today. Having lowered taxes on wealth, housing, businesses and capital gains by a broad extent in 2017, France lost around €62 billion annually in revenue—2.2% of GDP. The policies initially stimulated growth, lowered unemployment and attracted foreign investment. But successive crises—the yellow-vest revolt, the coronavirus and the war over Ukraine—pushed the government to expensive bailouts and subsidies that inflated the deficit.
Painful reforms and public outcry
To keep debt at bay, Macron managed to push through a controversial increase in the retirement age to 64, which is projected to save €17.7 billion by 2030. But the reform infuriated millions of workers and left Macron politically weakened. Bayrou's latest proposal to abolish two national holidays in a bid to boost productivity has only fuelled public indignation, with critics terming it as an attack on French history and heritage.
Investors lose patience
Serial failure by France to meet deficit targets has jolted financial markets. Yields on bonds have risen, ratings agencies have downgraded the nation's rating, and investors are treating French bonds with the same suspicion once reserved for Southern Europe. The credibility gap makes it harder for the government to borrow cheaply and contributes to the political risks of every fiscal decision.
What happens next
If Bayrou loses, Macron will have to install a new prime minister who is able to push a divided parliament through a contentious austerity agenda. But with no settled government in waiting, each government risks being one of transition, perpetuating the cycle of instability. To Europe, a weaker France—formerly viewed as one of the EU's pillar states—is a source of concern about economic stability and political unity in the face of international threats.
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