France’s National Rally and the budget: What happens next?

France could see a political earthquake in the coming days after the far right National Rally party gave the government a deadline of Monday to agree fresh concessions over the 2025 budget, or face a vote of no confidence that it said it would support.

National Rally (RN), led by Marine Le Pen and Jordan Bardella, has failed so far to get most of its budget demands met during negotiations with Prime Minister Michel Barnier over next year’s budget that involves 60 billion euros ($63 billion) worth of tax hikes and spending cuts.

RN has said that if there is no breakthrough on Monday, it is highly likely to support a no-confidence vote that the leftwing New Popular Front (NFP) alliance said it has already drafted against the minority government that Barnier has led only since September.

The leftwing bloc said it plans to table the no-confidence motion if Barnier’s government uses special constitutional powers to force through the budget bill, a move that would see him overriding opposition from both the left and right in the National Assembly, France’s parliament.

On Sunday, Le Pen said the government had effectively “put an end to discussions” on the budget, according to French news agency Agence France-Presse, which reported that Barnier now faced a choice of negotiating new concessions or the threat that his government will fall in a confidence vote.

RN says the budget reduces the purchasing power of the French people and wants concessions on tax hikes that it says will affect households and businesses. Among its demands, the party is calling on Barnier to increase pensions in line with inflation in January, to boost support for smaller businesses and to ditch plans to reduce medication imbursements. The prime minister has already dropped a planned increase in electricity tax.

On Monday, RN President Bardella reiterated that the party would likely back a no-confidence motion against the government in the coming days unless there is a “last-minute miracle,” in comments to RTL radio that were translated by Reuters.

If France’s political turmoil comes to a head and Barnier’s government is toppled, it’s uncertain what could happen next. New parliamentary elections cannot be held until next June, 12 months after the last snap vote that was called by French President Emmanuel Macron in an ill-judged move aimed at achieving more political stability, but one that instead created far less.

Money markets are already nervous about France’s unravelling political establishment and what that means for the euro zone’s second-largest economy’s needs to tackle its mounting debt pile and budget deficit, which is expected to stand at 6.1% in 2024. French public debt topped 110% of GDP in 2023.

Countries within the EU are obliged to keep their budget deficits within 3% of gross domestic product and their public debt within 60% of GDP. Even before those EU rules came into force, France was a long-time offender in failing to control its public spending, with no government balancing the budget since 1974.

France’s brewing crisis spilled into financial markets last week with the country’s borrowing costs hitting the same level as debt-ridden Greece’s for the first time on record last Thursday.

Taken as a whole, France is on the “wrong track,” economists at Berenberg Bank led by Holger Schmieding, said in analysis Monday, warning that “France urgently needs to correct its unsustainable fiscal policy,” while noting that the Barnier government was now “at the mercy of National Rally.”

Nonetheless, they noted in emailed comments that Le Pen had to play a carefully calculated political game in the coming days.

“Le Pen may want to present herself as the guardian of ordinary people by opposing some of Barnier’s tax hikes and spending cuts. But doing so would also be risky for her,” they said.

“If she now causes a financial crisis with a spike in bond yields and possibly a French recession, she could be seen as an agent of chaos rather than a responsible leader.” That, in turn, could damage her chances of winning the presidency in 2027, they noted.

“This calculus suggests that Le Pen may still try to find a compromise with Barnier, sparing France a political and financial crisis this Christmas,” they noted.

Even if the 2025 budget passes by some “last-minute miracle,” to borrow Bardella’s phrase, economists note that it will be a short-lived reprieve from France’s wider fiscal challenges.

“If the new and still very much minority government reaches agreement with National Rally and passes the 2025 budget, then it will produce some relief in markets … However, this would not fix France’s huge budget deficit and government debt problems that requires years of substantive fiscal tightening to get a primary surplus,” Mike Gallagher, director of macroeconomics and strategy at Continuum Economics said in a note Monday.   

“With the end of ultra-low interest rates, France’s debt servicing costs are projected by the ECB to rise above 4% by 2034, which would cause a major and persistent debt crisis. However, further multi-year fiscal tightening is unlikely before the next parliamentary election from July 2025 and perhaps the presidential election in 2027. France needs a high-risk premium to reflect political problems; insufficient momentum on fiscal consolidation and the risk that non-resident reduce their huge holdings (53% of outstanding debt),” he noted in emailed comments.

If the budget fails to pass, Gallager said, Europe’s financial markets would see heightened volatility.

He warned that the spread — the difference in yield between French and German bonds could mushroom from its current level of around 80 basis points to 150 basis points, and that the European Central Bank would be potentially forced to act, in some shape or form, to calm markets.

Berenberg Bank agreed that if French turmoil were to cloud the outlook for euro zone growth significantly, the ECB might have to adjust its overall monetary stance by cutting rates more than otherwise planned.

“However, we consider it highly unlikely that the ECB would step in directly to support France with bond purchases … The ECB would have no business to spare France the potential consequences of failing to pass a budget. France would have to get its act together on its own, possibly by the centre-left and/or Le Pen rethinking their opposition to the necessary fiscal consolidation,” Berenberg’s economists said.