French Prime Minister Michel Barnier thinks during questioning of the government at the National Assembly in Paris, December 3, 2024.
Julian De Rosa | AFP | Getty Images
The French government is once again on the brink of collapse as Prime Minister Michel Barnier refuses to bow to demands from the right and left for further concessions in his budget plan.
He is currently due to face a vote of no confidence on Wednesday afternoon, with a rejection almost certain.
Meanwhile, the German government is already on track for snap elections early next year, with its own no-confidence vote expected in the coming weeks.
In the UK, too, Prime Minister Keir Starmer and Chancellor of the Exchequer Rachel Reeves are under pressure after just five months in office, with the debate centering, as you might expect, on the budget.
So why has the national budget suddenly become so controversial?
In the eurozone, post-pandemic fiscal rules are putting pressure on even the most hawkish EU member states.
France, Italy and Greece have long been seen as breaking budget rules. But now Germany, Austria and the Netherlands are also violating EU deficit rules, which require countries to maintain deficits of 3% of GDP and debt ratios of 60%.
The European Commission, the EU’s executive arm, is currently making budget decisions that take into account not only next year’s fiscal plans, but also the impact it will have on the long-term trajectory of national budget deficits.
In Paris, Mr. Barnier’s gamble to push through 60 billion euros ($63 billion) in tax increases and spending cuts by invoking Article 49(3) of the French constitution has made him the shortest-serving French prime minister since 1958. Looks like it’s going to be a period.
Political brinkmanship has dragged French stocks lower, while borrowing costs have risen to their highest level since the eurozone debt crisis of the past decade.
In Berlin, Prime Minister Olaf Scholz made a surprise visit to Kiev on Mondayagreed to an arms deal worth 650 million euros with Ukrainian President Volodymyr Zelenskiy. The move raised eyebrows in Germany, as the government’s support for Ukraine was at the center of disagreement within the coalition.
The fall of the government could have long-term implications for Germany’s fiscal rules, with opposition leader Friedrich Merz saying he would consider overhauling once-sacred borrowing rules.
Budget-related damage has been compounded in the English Channel, where business confidence has fallen to its lowest level since the coronavirus pandemic and manufacturers have been hit hard since Mr Reeves announced plans to increase taxes. The economy is rapidly slowing down.
Europe will have to come to terms with this issue for some time to come, as the effects of a perceived “bad budget” appear to be taking a political toll.
Edmond Singh, global chief investment officer at BNP Paribas Wealth Management, said President-elect Donald Trump is set to re-enter the White House next month, just as the United States is clearing its post-election outlook. He emphasized that stagnation and instability are gripping Europe.
“This lack of political certainty in the heart of Europe, in the heart of Europe, probably comes at the worst possible time politically,” he told CNBC’s “Squawk Box Europe” earlier this week.
