The French government collapsed just 91 days after taking office, unable to reduce the deficit and struggling to save the economy?

Following South Korea's "overnight change," the French government was forced to collapse overnight due to a deadlock over the budget draft, with the opposition dismissing the French Prime Minister who had been in office for only 91 days. With France already mired in stagnating economic growth, massive debt, and deficits, can the economy withstand political turmoil?

According to CCTV reports, on Wednesday, December 4th, the French National Assembly voted to pass a motion of no confidence against the current government.

This marks the first time since 1962 that a French government has been overthrown due to a no-confidence vote in over 60 years, and Prime Minister Barnier has become the shortest-serving Prime Minister since the establishment of the Fifth Republic of France in 1958.

Now the French government is unable to operate normally and cannot formulate next year's budget to control the fiscal situation. Coupled with the fact that the economy is already in trouble, will France face an economic crisis?

Mired in Massive Deficits

This no-confidence motion stems from an internal "budget dispute" in France, which has been struggling to cope with its ever-expanding debt and deficits. Recently, market concerns about France's credibility have escalated, pushing France's borrowing costs above those during the "Greek crisis."

Barnier attempted to pass a budget plan through Parliament that included tax increases and spending cuts of €60 billion to control France's rising public deficit, but the 2025 budget proposal has faced opposition in Parliament, and the Barnier government has refused to amend the proposal, leading to a deadlock.

In fact, during Macron's first term, France's deficit began to widen.

In 2018, to quell public protests against the increase in fuel taxes, Macron introduced billions of euros in subsidies and stimulus measures; two years later, with the onset of the COVID-19 pandemic, Macron vowed to "do everything possible" to support the French economy, investing hundreds of billions of euros to help businesses; just as the economy seemed to be recovering, the Russia-Ukraine conflict erupted in 2022, leading to soaring energy prices, prompting Macron to approve another round of massive government spending.

French Economy Continues to Weaken, Rising Number of Bankruptcies

Government spending has continued to expand, while the economy remains weak.

At the time of this crisis, some economic indicators are relatively stable, with France's GDP expected to grow by 1.1% this year, but this does not mask the fact that the French economy has weakened over the past few years.

Denis Ferrand, head of the Paris economic research institute Rexecode, stated:

The competitiveness of French and European companies has declined, with production costs rising by 25% since 2019. A quarterly survey of 1,000 French SMEs showed that only 36% of companies planned to maintain investment in October, 45% indicated they would postpone investment, and 18% hoped to cancel investment.

The number of bankruptcies is on the rise, and layoffs are sweeping across the entire economic sector.

Philippe Druon, a bankruptcy and restructuring lawyer at the Paris law firm Hogan Lovells, stated:

The number of bankruptcies today is as high as during the 2008 financial crisis, with approximately 65,000 companies expected to file for bankruptcy this year, compared to 56,000 last year.

The intensity of layoffs is also increasing, with energy-dependent companies, including global tire manufacturer Michelin and leading chemical manufacturer Vencorex, announcing last month that they would cut production capacity and lay off thousands of workers One of France's largest construction companies, Nexity, announced this spring that it would lay off nearly 1,000 employees due to high interest rates impacting the real estate market. The large supermarket retailer Auchan announced one of its largest layoff plans ever last month.

The uncertainty in the job market, coupled with the cost of living crisis, has led to more savings than consumption among the French, further weakening economic activity.

Political Turmoil Intensifies Economic Dilemma: Will France Fall into an Economic Crisis?

Charlotte de Montpellier, Chief Economist for France at Dutch Bank, stated:

Political instability is bad news as the French economy experiences a noticeable slowdown in growth.

High energy costs and interest rates, industrial stagnation, declining consumer confidence, and slowing corporate investment have resulted in virtually flat economic growth over the past two years. Since Macron dissolved parliament this summer and held early elections, leading to a more fragmented legislature, political instability has caused companies to further pause investment and hiring.

The Confederation of Small and Medium-sized Enterprises, representing a major pillar of French economic activity, stated:

The division on Wednesday could open the door to a "new period of instability," and a France without a budget could lead to a debt crisis, the consequences of which would heavily impact economic participants.

However, Anne-Sophie Alsif, Chief Economist at Paris consulting firm BDO, remarked:

The above factors alone would not cause a severe economic situation, but political factors would. Macroeconomic data was about to improve, but if the government collapses now and parliament cannot pass a tailored 2025 budget, France will fall into an economic crisis, which would be catastrophic.

We indicate to investors that our country lacks the capacity to implement a deficit reduction plan, and the 2024 budget is likely to repeat in 2025, with France's deficit increasing to over 6%