The Breaker Times

French President Emmanuel Macron’s long-awaited appointment last week of Michel Barnier as prime minister marked the end of a period of political uncertainty in France following its inconclusive snap election in July.

France’s challenges are far from over, however, with the country facing acute fiscal challenges and an ongoing threat posed by the far-right National Rally opposition, led by Jordan Bardella and Marine Le Pen.

Veteran conservative and former Brexit negotiator Barnier’s first task is to oversee the formation of a draft budget for 2025 in record time, as it must be put to the vote in France’s National Assembly in October.

The euro zone’s second-largest economy must also present a deficit reduction plan to the European Commission within weeks if it is to avoid disciplinary proceedings, as its budget deficit, deemed “excessive” by the EU’s executive arm, continues to break EU rules. France this week asked the Commission to extend its deadline of Sept. 20 to submit debt reduction proposals.

Countries within the EU are obliged to keep their budget deficits within 3% of gross domestic product (GDP) and their public debt within 60% of GDP.  France’s budget deficit stood at 5.5% of GDP in 2023, and public debt topped 110%, meaning France must make steep spending cuts and introduce tax rises if it is to have any chance of bringing down its deficit.

It’s a particularly tough challenge for Barnier, a conservative from the right-leaning Les Republicains party with slim support in France’s fractious parliament.

Barnier’s appointment has already provoked mass protests in France with the New Popular Front, a left-wing coalition made up of four parties, furious that its own candidate for the premiership was rejected by Macron — despite the alliance winning the largest vote share in July’s election.

At best, Barnier can likely count on the support of 47 deputies from his own center-right Les Republicains party, as well as 166 from Macron’s centrist alliance and up to 21 independents (and making a total of 228 deputies, at the most).

But he is highly likely to face strong opposition from the NPF (with 193 seats) and could be at the mercy of the National Rally, with its 142 assembly seats, for support.

Analysts say Barnier’s political survival therefore “depends on the whims and personal-political calculations of Le Pen.”

“At any time, she can add her 142 assembly votes to the 193 held by the left. That would produce many more votes than the 289 needed to bring down the Barnier government,” Mujtaba Rahman, managing director of Europe at Eurasia Group, said in a note Monday.

France’s far-right, meanwhile, appears to be relishing the opportunity to become a kingmaker — able to influence government with the promise of support, or the threat of dissent.

Twenty-eight-year-old Bardella, president of National Rally, described Barnier as a prime minister “under surveillance” and the party, which still operates under the aegis of figurehead Marine Le Pen, is widely expected to pressure Barnier’s government to pursue policies in line with its own anti-immigration agenda and pledge to improve living standards for French citizens.

Sandwiched between a vengeful left feeling “robbed” of an election victory, and the far-right knowing it plays a key role in whether the Barnier government survives or falls, analysts say France is likely to face continuing instability in the near term.

Passing a budget that puts France’s public finances back on track is the immediate challenge facing Barnier’s government — and that will be no easy task, analysts and economists warn.

“Barnier will face a brutal first few weeks in office as he confronts a deep fiscal crisis with the most fragile government in recent French history,” Eurasia Group’s Rahman continued.

“The great unknown … is how far Le Pen will be willing to address the most immediate crisis facing Barnier and the country: the painful choices needed to prevent France from plunging into a destructive fiscal crisis by the end of this year,” he said.

Warning that Barnier’s term “could be cut short at any moment” if Le Pen’s far right joins with the left to support a censure motion, he said it was more likely, for now, that Le Pen will “passively support Barnier’s government if he advances her priorities on migration, the cost of living, and proportional representation, but Le Pen’s strategy will remain fluid and opportunistic and could change weekly.”

It means the ways in which Barnier’s government courts the support of its opponents — and how National Rally will respond to the government’s draft budget and emergency spending cuts (envisaged by the finance ministry at around 16 billion euros, or $17.6 billion) — will be closely watched.

Eurasia Group noted that Le Pen and National Rally are likely to want to avoid tipping France into political and economic crisis, aiming to appear as the “responsible” opposition in the electorate’s eyes (especially as the party looks ahead to the 2027 presidential election).

However, Barnier will “be at the mercy of the ultimately self-interested calculations of Le Pen and the far right,” the political risk consultancy said. It gave him a 55% chance of succeeding and remaining in the role into 2025.

Andrew Kenningham, chief Europe economist at Capital Economics warned that Barnier will struggle to pass the 2025 budget, however.

“We doubt that ‘Mr Brexit’ will be able to pass a budget that puts the public finances back on track. To get through parliament, the 2025 budget will need to be acceptable to Marine le Pen’s National Rally, which until recently advocated large tax cuts and the reversal of Macron’s 2023 pension reforms,” he noted in analysis.

“Moreover, outgoing Minister of Economy Bruno le Maire revealed earlier this week that the budget deficit is set to be 5.6% this year, slightly higher than last year (5.5%) and well above the 5.1% previously anticipated,” he added, with both sales tax and corporate tax revenues lower than anticipated this year.

“All told, we suspect that French government bond spreads will remain above their pre-election levels and may even rise further,” Kenningham noted.

The French 10-year government bond yield currently stand at 2.86% after spiking to around 3.3% at the height of political uncertainty in summer. The spread (or difference in the yield, which reflects the risk premium investors demand for holding a riskier bond) between German and French 10-year yields currently stands at 71 basis points, having narrowed from over 81 basis points in late June.