Fall Of Govt Leaves France Without Clear Path To Cutting Deficit: S&P

Michel Barnier is poised to resign, becoming the shortest-serving prime minister in modern French history, after a vote by far-right and leftist lawmakers toppled his government. This political upheaval leaves France without a clear strategy for addressing its fiscal deficit, raising concerns about future budgetary discipline.

The fall of Barnier’s government has created uncertainty over France’s economic direction. According to Standard & Poor’s (S&P), the country is now likely to face reduced fiscal tightening in the short term. Previously, Barnier had worked to implement a 60-billion-euro austerity package, but opposition lawmakers rejected key parts of the 2025 budget despite several concessions.

With the collapse of the government, the most probable outcome is the passage of emergency stopgap legislation. This would extend the 2024 spending limits and tax provisions into 2025 until a new, permanent budget is approved. However, if this legislation fails in parliament, President Emmanuel Macron may resort to exceptional budget measures, bypassing the legislature to prevent a government shutdown similar to those seen in the U.S.

S&P stated that these developments would likely result in a less stringent fiscal approach than initially proposed. The government’s prior budget plans, which included new taxes, are now in doubt, potentially leading to more relaxed budgetary consolidation than expected.

Credit Rating Agencies Respond to Government Collapse

The political instability has prompted concerns from major credit rating agencies. Moody’s downgraded France’s credit outlook to negative, citing risks of a larger-than-expected debt burden. Meanwhile, S&P maintained its AA- rating on French government debt but warned that the collapse could strain France’s fiscal position.

These rating adjustments reflect the heightened risks associated with France’s political and economic future, as uncertainty grows over how the country will manage its finances in the coming years.