Approaching Decision: Unraveling the Potential Outcomes of the Confidence Vote on September 8th
France is bracing for a period of heightened uncertainty as Prime Minister Bayrou prepares to seek a parliamentary confidence vote on September 8th. The outcome of this vote will be closely monitored, as it could trigger either snap elections or the appointment of a new prime minister.
Bayrou's minority government lacks the numbers, and opposition parties across the spectrum have signaled their intent to vote against him. The left-wing party La France Insoumise (LFI), the right-wing neofascist Rassemblement National (RN), the Communist Party (PCF), the Greens, and the Socialists (PS) have all announced they will not support the government.
If Bayrou does not receive the confidence of the parliament, Article 50 of the French Constitution requires his resignation, and the government would be disbanded. This would lead to a power vacuum and potentially leave France relying on stopgap measures to avoid a government shutdown.
Delays in forming a new government could mean that Parliament misses its constitutional deadline to examine the draft finance law before the end of the year. This could have significant implications for France's financial stability, as the country's public debt is projected to exceed 120% of GDP by 2029, up from 113% at the end of 2024.
The public deficit is expected to remain above 5% in 2025, far from the EU's 3% ceiling. Comparisons between France's current situation and past crises in Italy and the UK reveal significant differences, with France's economy being more diversified and resilient. However, historical trends indicate that foreign investors, especially Japanese accounts, are more risk-averse, underscoring the necessity for France to mitigate political risks to prevent potential sell-offs.
The French 10-year OAT-Bund spread has widened by 10-15 bps since mid-August, reflecting the increased uncertainty in the market. Growth is projected to slow to around 0.6-0.7% in 2025, down from 1.1% in 2024, and part of this slowdown could be attributed to political uncertainties.
France's 2026 budget is already under scrutiny, with the Budget plan presented by PM Bayrou mid-July including an effort of €43.8 bn for 2026. France will be reviewed by four major rating agencies by the end of the year, and the outcome of the confidence vote could have a significant impact on France's credit rating.
IMF Chief Economist Pierre-Olivier Gourinchas stated that France's financial independence could be at risk if no action is taken to alter its debt path. He urged the French government to take decisive action to address the country's fiscal challenges and reduce its reliance on debt.
In the meantime, French banks have increased their holdings in OATs significantly over the past two years, providing a measure of support for the country's bond market. However, the potential for a government shutdown and the uncertainty surrounding the outcome of the confidence vote could lead to further volatility in the market.
As the world watches France, it remains to be seen how the country will navigate this period of political uncertainty and whether Bayrou will be able to secure the confidence of the parliament and avoid a constitutional crisis.
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