French government’s collapse adds to already weak economy

Economic Uncertainty, Political Unrest

The recent fall of the French government has further destabilized the country’s economy, which is already struggling with flat growth and a heavy debt load. Following a no-confidence vote in Parliament on Wednesday, Prime Minister Michel Barnier and his cabinet were removed, leaving the country without a budget or a functioning administration. One of the biggest economies in Europe could see further economic hardship as a result of this political gridlock.

Business and Labour Reactions

Business leaders, who have been navigating months of uncertainty, are bracing for a negative impact on growth. Unions are warning of increased layoffs, and thousands of civil servants, including teachers, hospital staff, airport employees, and workers in the gas and electricity sectors, are planning street protests. These developments come at a time when high energy costs, rising interest rates, and a downturn in domestic industry have already left growth largely stagnant.

Economic Challenges and Fiscal Troubles

France has been struggling with multiple economic challenges: high energy costs, rising interest rates, and declining consumer confidence have all contributed to economic stagnation. Since Macron dissolved Parliament in the summer and held snap elections, the political instability has caused businesses to pause investments and hiring, exacerbating the economic slowdown.

The absence of a budget for the coming year could lead to a debt crisis, with severe consequences for economic players. France, once a cornerstone of Europe’s euro currency union, has seen its status erode due to these fiscal troubles. The country’s ballooning debt and deficit, the result of extensive government spending since the pandemic, have raised concerns about its creditworthiness.

Corporate and Job Market Impacts

Before the parliamentary vote, signs of trouble were already evident with numerous layoff announcements across various sectors. Energy-dependent companies like Michelin and Vencorex announced job cuts, while Nexity, a major construction firm, and Auchan, a leading retailer, also planned significant reductions. This job market uncertainty, combined with a cost-of-living crisis, has led to reduced consumer spending, further impacting retailers, restaurants, and hotels.

Business bankruptcies have soared after being kept artificially low through government support in the years following the lockdowns. Macron’s administration spent over €150 billion on state-guaranteed loans to keep companies afloat, but as these debts came due, many businesses were unable to pay, leading to increased unemployment.

Future Outlook and Economic Strategies

France’s financial woes have only intensified as its deficit rose to 6.1% of economic output, up from 5.5% the previous year. The country’s debt now exceeds €3.2 trillion, more than 112% of its GDP. This financial deterioration is worse than that of Greece, Spain, and Italy.

The government’s efforts to address the fiscal gap included announcing €10 billion in state spending cuts and a second savings plan. However, the political and financial uncertainty makes a further economic downturn seem inevitable. The European Commission recently projected France’s growth to slow to 0.8% next year, down from 1.1%.

Companies are now in a difficult position, unsure of what corporate tax levels will be in the next fiscal year. This uncertainty is causing them to delay investments and hiring, exacerbating the economic downturn. The next government, whenever it is formed, will face an even tougher task in stabilizing public finances and addressing the growing public deficit and debt.