PRIMER: French budget deadline looms, Barnier’s gov’t awaits Le Pen’s decision

• Before the end of today’s French parliamentary session, Barnier’s government must submit the social security budget details to the National Assembly. As it stands, Barnier's centre-right gov’t cannot pass this unless National Rally (RN) provides support or abstains. Currently, Barnier’s coalition has the most seats followed by New Popular Front (NFP) and then RN.


• Barnier has already made clear he plans to pass the motion via Article 49.3, which allows the gov’t to pass measures without a formal parliamentary vote but at the cost of opening the door to an immediate no-confidence motion.


• In recent days Barnier made concessions to RN’s Le Pen around electricity taxes and certain other issues in order to get her support and avoid losing the no-confidence motion. However, Le Pen has made clear that RN has multiple red lines which need to be removed from the budget.


• On Sunday, Le Pen announced that Barnier had “ended the discussion” while more recently RN’s Bardella said a no-confidence motion will likely be passed unless there is a “last minute miracle”.

Likely Process

• On Monday, 2nd December Barnier’s gov’t will announce they are passing the social security budget via Article 49.3. After which, opposition parties will be entitled to table a no-confidence motion.


• The left-wing alliance NFP is expected to table such a motion. As a reminder, NFP secured the most seats in June’s election but President Macron decided not to select the PM from that group and instead tried to form a centrist coalition with Barnier at its helm. As such, they have committed to tabling a no-confidence motion which will pass if, and only if, RN supports it.


• If tabled, the motion will likely occur on Wednesday, 4th December. After Article 49.3 is used opposition parties have up to 48-hours to table a no-confidence motion which then needs to be voted on within three days. However, there is no reason for NFP not to table the motion immediately, hence Wednesday is the most likely day. For what it's worth, RN also appears to have a no-confidence motion ready to go.


• Following this, the next step goes to President Macron who will attempt to appoint a new PM, get support around them and then pass the required fiscal legislation by year end to have a workable budget for 2025 and appease the European Commission. As a reminder, the Commission placed France under excessive deficit procedures due to its deficit being well in excess of the 3% debt/GDP ratio the commission allows.

Le Pen

• It is somewhat unclear as to what exactly Le Pen wishes to gain from the gov’t collapsing. As parliament cannot be dissolved until June 2025 at the earliest and while the gov’t collapsing will put pressure on Macron to resign, he has made clear he will not do so.


• There had been speculation that Le Pen’s stance was a negotiating tactic in order to obtain some of her red lines. If this is the case, then it is going to the wire.

Next Steps

• In the event that Barnier survives the confidence motion then he has to return before end-December with the management component of the budget. A bill which would also need Article 49.3 to pass and thus will open the door to another confidence motion.


• If Barnier loses the motion then Macron will need to appoint someone to serve as the new PM. In the short-term, Barnier would likely continue as a caretaker during which there are two backup options for the government: 1) usage of special legislation to rollover the 2024 budget for a brief period of time (this would not solve the pressing budget problems); 2) usage of a gov’t order to pass the budget without vote, while this would pass the budget there would be no gov’t to deliver it (Barnier couldn’t as caretaker), thus Macron would need to appoint a new PM. A government which would undoubtedly face even greater pressure from NFP and RN.

Ratings

• S&P affirmed France at AA- on Friday, with a Stable outlook, recognising Barnier's austerity plan to reduce the deficit. However, the agency warned that political fragmentation and the risk of diluted reforms could threaten long-term fiscal stability, and while it is optimistic about 2025's fiscal targets, it cautioned that the future trajectory beyond 2025 remains uncertain.

OATs

• The OAT-Bund 10yr yield spread is modestly wider today, at around 84bps. In recent sessions it has been as high as 90bps, the widest since 2012.


• Elsewhere, the French 10yr yield surpassed its Greek counterpart last week for the first time on record.

02 Dec 2024 - 08:10- Research Sheet- Source: Newsquawk