As France faces deepening political turmoil following a parliamentary vote that ousted Prime Minister Michel Barnier and his cabinet, concerns are mounting over the potential economic impact on one of Europe’s largest economies.
Business leaders are preparing for a downturn in growth, while unions are warning of increasing layoffs. Civil servants, including teachers, hospital staff, and airport employees, are planning nationwide protests in response to the government’s collapse.
The vote of no-confidence leaves France without a functioning government or an approved budget for the upcoming year, exacerbating existing economic challenges. Barnier is expected to serve as a caretaker until President Emmanuel Macron appoints a new prime minister, with the current budget being utilized until a new one can be established.
Charlotte de Montpellier, chief economist for France at ING bank, noted that the political instability is particularly concerning given the already slowing economic growth in the country. High energy costs, rising interest rates, and a downturn in domestic industry have contributed to stagnant growth over the past two years.
The Confederation of Small and Medium Enterprises warned that the absence of a budget could lead to a debt crisis, significantly affecting economic players. The current situation poses serious risks for France, a key member of the euro currency union, which has seen its economic standing decline alongside Germany due to the ongoing energy crisis and high interest rates.
France's economic troubles are compounded by a rising debt and deficit, attributed to significant government spending during the pandemic. Investors are increasingly concerned about the country’s creditworthiness, as France's borrowing costs have escalated beyond those of Greece.
Prior to the vote, several companies announced layoffs, with energy-dependent firms like Michelin and Vencorex reducing production and jobs. The job market uncertainty, coupled with a cost-of-living crisis, has led to decreased consumer spending, further straining the economy.
Business bankruptcies are increasing after a period of government support following lockdowns, with many companies now unable to repay state-backed loans. Unemployment is also on the rise, with the jobless rate climbing from a 15-year low of 7.1 percent to 7.4 percent.
France's industry minister indicated that more job cuts are likely in the coming months as the country grapples with an escalating fiscal crisis. The deficit has risen to 6.1 percent of economic output, surpassing that of Greece, Spain, and Italy, while the national debt has exceeded €3.2 trillion.
The financial issues have been exacerbated by previous government spending in response to social unrest and the pandemic, leading to unsustainable fiscal practices. Recent attempts to address the deficit through spending cuts and tax increases have been complicated by the current political instability.
Economists predict a further economic downturn, with the European Commission projecting growth to slow to 0.8 percent next year, a forecast that some now consider overly optimistic. The uncertainty surrounding corporate tax levels has led businesses to delay investment decisions.
Patrick Martin, president of France’s largest employers federation, noted that businesses are already feeling the effects of the political situation, resulting in reduced investment and hiring. The next government will face significant challenges in addressing the high public deficit and ongoing fiscal deterioration.
Experts warn that the combination of political instability and economic challenges will make it increasingly difficult for any future government to restore fiscal stability in France.