France’s centrist prime minister, François Bayrou, has just lost the parliamentary vote of confidence he called ahead of presenting his package of tax increases and budget cuts
As widely expected, France’s centrist prime minister, François Bayrou, has just lost the parliamentary vote of confidence he called ahead of presenting his package of tax increases and budget cuts (which was intended to cut the deficit to 4.6 percent from 5.4 percent). It was not even close, the vote went against his minority center/center-right government by 364–194, as the left and Marine Le Pen’s RN joined forces to unseat it after just nine months.
Before the vote, Bayrou had told parliament that it had “the power to topple the government,” not “the power to erase reality.” Frances’s finances were, he added, “a silent, underground, invisible, and unbearable hemorrhage.”
That reality is the deficit, and a debt to GDP ratio of 114 percent. The latter is the third worse in the EU after Italy (138 percent) and Greece (152 percent), but Greece, still governed by the tough commitments it entered into at the time of its final (?) restructuring, is currently on an improving trajectory. Meanwhile, under the astute Giorgia Meloni, Italy has been regaining some control of its finances (the debt may be horrendous, but the budget deficit is down to 3.4 percent) and by Italian standards politics are remarkably calm. Meloni is about to celebrate her third anniversary of becoming prime minister, no mean feat.
Bayrou will resign on Tuesday, and President Macron will formally begin a search that must have been underway for some days. Once again, he will look through the centrist ranks. I heard one of the Socialist leadership on the BBC this morning saying that their lot should be given a shot. Their budget would be lighter on cuts and heavier on taxes, not what France needs. Macron’s target is to find someone capable of forming a government that can get a budget through by year-end. What happens if he fails is a known unknown.
The RN is calling for parliamentary elections now, which is the last thing Macron wants. It was his decision last year to call snap elections after his allies fared badly in EU elections that created today’s fragmented parliament, a state of affairs that would be unlikely to be changed by yet another vote. Macron himself has no intention of standing down early (his term ends in 2027).
The next stage in this drama will be a day of protests set for Wednesday. The left will be out and about, but it will be worth watching to see how far across the political spectrum the protests go.
The longer this impasse continues, the higher French interest rates are likely to go (worsening France’s deficit) until, that is, they go high enough to trigger some sort of intervention in the secondary markets by the European Central Bank to calm things down. The ECB has no interest in seeing a return of the eurozone crisis.
That’s understandable, but intervention by a central bank to push interest rates lower than where markets are signaling that they should be comes with a catch.
As economist Robin Brooks explains:
[It effectively] removes any incentive for policy makers to pursue fiscal consolidation. After all, spending cuts and tax hikes are never popular. If there’s no risk of a debt crisis, why bother with arduous reforms that will get you booted out of office.
The current stand-off in France over fiscal consolidation is a direct reflection of this dysfunction. Without the risk of a serious debt crisis, why should the opposition back government efforts to bring the budget under control? ECB actions are skewing incentives and France is a symptom of that.
No good (other than in an emergency) comes of artificially suppressed interest rates. The Fed would do well to remember that in in the next year or so, too.