The government is on the brink of collapse, and France is facing a "critical moment."

Is the French government about to "collapse" less than three months after its establishment?

According to Bloomberg, French lawmakers will hold a vote of no confidence on Wednesday, which could lead to the resignation of Prime Minister Barnier's government, meaning that this government, which was just formed in September, could become the first French government since 1962 to be forced out due to a no-confidence vote. Barnier would also become the Prime Minister with the shortest term since the establishment of the Fifth Republic of France in 1958.

Wallstreetcn previously mentioned that due to the government's heavy debt burden, Barnier is attempting to pass a budget plan in parliament that includes tax increases and spending cuts of €60 billion to control France's rising public deficit, but the proposal has faced opposition from the French National Assembly, which is in a "suspended parliament" state.

Barnier stated on Monday that he would invoke Article 49.3 of the constitution to pass the Social Security Financing Bill without a parliamentary vote. This move prompted threats from far-right leader Le Pen, who stated that unless Barnier adjusts the 2025 budget, she would vote in favor of the no-confidence motion.

Earlier, left-wing groups had already promised to propose a no-confidence vote if the government invoked Article 49.3.

According to regulations, after the opposition proposes a no-confidence motion, parliament must begin debate within 48 hours and within three days, meaning the no-confidence vote could take place as early as Wednesday, with results potentially coming this week, putting the French government in a "countdown to resignation."

What are the implications of the government's "resignation"?

If the government is voted down, the current government will become a caretaker government, with ministers handling current affairs in a temporary capacity. They will still need to propose emergency financial measures to avoid a government shutdown until French President Macron appoints a new Prime Minister or reappoints Barnier to draft a new budget.

Although the constitution does not specify a deadline for the president to decide on a new Prime Minister, it states that France cannot hold two National Assembly elections within a year. Therefore, in the most extreme case, the political deadlock in France could last intermittently until July next year, when there might be an opportunity for Macron to dissolve the assembly again to break the deadlock.

French Finance Minister Antoine Armand stated that if the government collapses in the coming days, the French economy will face painful consequences.

According to Armand, relying on emergency measures will force 380,000 families to pay income tax, while another 18 million families will see their bills increase, and emergency aid for farmers will also be impossible to implement. The government will also be unable to continue its plan to hire more police officers. Armand stated:

“In an economy with rising interest rates, in an economy without a budget, in an economy mired in uncertainty, no industry can win, no French person can win, no business can win.”

The dangerous political situation has prompted investors to sell French assets, leading to a "double whammy" in the French marketLast week, the yield on 10-year French government bonds rose to a high of 2.992%, matching that of Greece, which was once at the center of the European debt crisis. The benchmark stock index in France has led the decline in European stocks this year and is set to hit its lowest level since 2010.

On Monday, the yield spread between 10-year French and German government bonds widened again by 7 basis points to 88 basis points, approaching the highest level since 2012.

Dissolution without "shutdown": Is France entering extreme tightening mode?

Although the French government may be overthrown in Wednesday's no-confidence motion, the emergency law "special law" ensures that the French government will not experience a "shutdown" like the U.S. federal government.

Under the special law, the government will be authorized to operate at a minimum level of spending (only to maintain the most basic public services) and cannot exceed the spending level of the 2024 budget proposal, which may lead to significant tightening of government spending.

Public law professor Anne-Charlene Bezzina stated:

“The special law only allows the state to operate and does not permit the government to incorporate political factors into the budget. This will be true tightening, with only pure recurring expenditures.”

However, the special law has never been used since its introduction in 2001. Reports also indicate that it is difficult to predict how a weak government would implement these terms and the subsequent impacts of such implementation.

In addition to the special law, the government can also request the parliament to vote only on the "revenue" portion of the 2025 annual budget proposal before December 11, or submit a special tax law by December 19 to allocate funds necessary for the country's operation, which must not exceed the budget for the 2024 fiscal year. The French government has previously undertaken similar actions in 1963 and 1980.

In summary, before the budget proposal deadline on January 1, the French government still has various ways to ensure that the 2025 budget proposal is not abandoned, but given the extremely special circumstances, the outlook remains full of uncertainty.

Bruno Cavalier, chief economist at Oddo BHF, analyzed that the collapse of the French government due to the budget proposal has no historical precedent, and there are no answers on what to do in the future:

“Ultimately, what to do after the budget is not passed, (we) have no manual.”

“We are testing the limits of a national system that should have a political stability of a republican monarchy.”