France is experiencing one of the most serious political crises in its recent history. The government of Prime Minister Michel Barnier was toppled after just 3 months by a vote of no confidence, supported by an unusual alliance of the left-wing alliance and the right-wing nationalists. These events not only have domestic political consequences, but also implications for the economy, financial markets and European stability.
The fall of the government: how & why?
The government under Michel Barnier failed in a vote of no confidence with 331 out of 577 voteswhich just exceeded the required majority. A total of 58 MPs had to table a motion for this. An alliance from the political left and the right-wing nationalist parties under Marine Le Pen, which are ideologically far apart but were united in their opposition to the center-right government.
Reasons for the fall
- France's political landscape is very mixed, meaning that no party has its own majority.
- The attempt to push through a strict austerity budget met with resistance from both left-wing and right-wing MPs.
- Prime Minister Barnier was unable to gain broad support within the National Assembly.
Impact on France
- Important reforms and laws remain on hold, including the austerity budget for 2025. Without the budget being passed, deficits could continue to rise.
- Although Macron remains formally untouched, he must form a new government and restore the confidence of the French people. The confidence of investors must also be taken into account, as they are skeptical about the stability of the eurozone's second-largest economy. I will come back to this later.
Overview of yields
- The yields on ten-year French government bonds rose to 3,02%the highest level since the European sovereign debt crisis in 2011/2012.
- The spread to German government bonds reached 90 basis points a record high for more than a decade. Analysts expect the spread to rise to 100 basis points in the future.
It is also interesting that French bonds are now approaching "crisis states" such as Italy and Greece in terms of their risk assessment. Investors are also massively withdrawing from French government bonds, which is depressing prices and causing yields to rise significantly further.
Danger of spillover effects
- Contagion in the eurozone: Uncertainty in France could affect yields in other EU states and jeopardize the stability of the eurozone.
- Nevertheless, I do not believe that there is any spillover from the current situation.
Benjamin Melman, Global CIO at Edmond de Rothschild, argues that French blue chip equities have already priced in most political risks, including the possible collapse of the government. However, a "short squeeze" could occur, where investors who short the market are forced to buy back shares, which could push prices higher. The CAC 40 index has underperformed other European indices in 2024, falling by 3.5%, while the $XSX6 (-0.79%) has risen by 7.9%. The volatility of the $CAC (-0.22%) remains high.
