Quite a few observers have described the dramatic fall of the Barnier government in France not just as a political crisis but also an economic and financial crisis. While it does signal significant political divisions that will not heal anytime soon and will undermine growth, this is neither a “Truss moment” for France nor will it lead to a repeat of the 2012 European debt crisis.
Prime Minister Michel Barnier will resign after losing the no-confidence vote in the National Assembly triggered by his attempt to force his budget through, marking the shortest tenure in the history of the modern French Republic. Meanwhile, as French law precludes an election until July, President Emanuel Macron will appoint a replacement.
This is the easy part of the political prediction game, as is the forecast that, with such a deeply divided parliament, it is unlikely that Barnier’s replacement will gain significant traction. This will result in more pressure on Macron to resign, something that he absolutely opposes because he views himself as the guardian of France’s stability.
This unstable and ultimately unsustainable configuration lies at the heart of worries that France is stuck for now in a political logjam. But combined with a rather unfortunate economic and financial situation – a 6% budget deficit, unemployment above 7%, a debt-to-GDP ratio of 112% and growth languishing at 1% — the fear extends beyond politics.
After all, it has only been two years since the UK saw budget-related political developments cause financial disorder that almost broke the country’s pension system. And it has been just over 10 years since the euro zone was battling a government debt crisis that threatened its integrity.
Yet neither of these examples apply to France. Britain’s “Truss moment” involved a political initiative to worsen a bad budgetary situation. It coincided with a period of global financial instability, and Britain had no access to external backing. By contrast, Barnier was attempting to improve a bad budgetary situation. His fall coincides with a period of global financial euphoria. France has access to the “pooled insurance” that is an integral part of the euro-zone setup.
That pooled insurance has been strengthened significantly since the 2012 financial crisis. This has involved not only a much greater understanding of regional fragilities but also important crisis management experience that has been reinforced by institutional enhancements.
All this is not to say that the current political uncertainties have no economic implications. Recent political developments are likely to discourage investment and make households more cautious in how much they spend, thereby lowering what already was an anemic growth rate. Higher borrowing costs will further undermine the country’s economic momentum. Already, the yield spread on French government bonds, a widely accepted indicator of sovereign risk, is at its highest level against Germany since the European debt crisis. It’s at the same level as Greece, a once-unthinkable development, and well above those of Ireland, Portugal and Spain (all members of what was labeled the “Periphery” in 2012).
Lower growth in France, Europe’s second-largest economy, is bad news for the region. This is especially so as Germany, the largest economy, is in the run-up to an election. Neither country is in a position to lead the types of reforms needed to enhance Europe’s competitiveness and productivity, rendering the continent in an even weaker position to negotiate trade and other issues with the incoming Trump administration.
There is very little joy in an economy marred by a vicious cycle of messy politics contaminating already challenging economics, and vice versa. This is where France is today. But this is not a financial crisis moment.
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