French government changes: market factors to watch

France is in the grip of political upheaval. But what is the impact on markets?

What has happened?
The French parliament voted on 4 December to oust Prime Minister Michel Barnier over his proposed budget. Mr Barnier’s resignation follows snap parliamentary elections in July, which resulted in a hung parliament with no party having an overall majority. New parliamentary elections cannot be held until June 2025.

For now, Mr Barnier will likely stay on as “caretaker” until a new government is chosen. The immediate objective for the next government will be to find a minimum political common agreement to construct a budget. If not passed by the end of December, the 2024 budget will be rolled over, ensuring there will be no shutdown.

However, rolling over the budget could increase the country’s budget deficit – the gap between spending and tax income – even further. Initially forecast at 4.4% of gross domestic product (GDP) in 2024, and then successively revised to 5.1% and 5.6%, the deficit should finally exceed 6% this year. As the government is expecting 2025 growth to be above 1%, any risk of undershooting this target could drive the deficit higher, leading to further deterioration of the debt to GDP ratio above the initial 114.9% targeted (see Exhibit 1).

As Mr Barnier noted before the vote “the French debt will not disappear because of a vote”.

Matthieu de Clermont, CIO Insurance & Regulatory Strategies
Catherine Garrigues, CIO Convictions/SRI
Stefan Rondorf, Senior Economist