France’s government collapses – could it trigger the next euro crisis?

“Europe once again stands at the edge of the precipice, staring into the abyss below,” says Jeremy Warner in The Telegraph. The 2009-2012 eurozone crisis was centred on “tiny” Greece – just think what debt problems in a major economy such as France could do to the single currency.

French prime minister Michel Barnier’s three-month-old minority government has collapsed after being ousted in a vote of no-confidence on 4 December, following which Barnier resigned. Barnier’s “fragile” administration had been trying to close a fiscal deficit of 6.1% of GDP with €60billion in spending cuts and tax hikes, says Liz Alderman in The New York Times.

His plans have drawn the ire of opposition parties, with the far-left and far-right ganging up to vote him down. That leaves president Emmanuel Macron in a bind. France’s legislature is hopelessly divided, and Macron legally can’t call fresh parliamentary elections until June next year. The risk premium, or “spread”, between benchmark French and German government bonds has touched 90 basis points, the highest level in 12 years. In a further humiliation, financial markets have started charging France the same amount as Greece to borrow for a decade.

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Talk of a Greek-style crisis is “for the moment... a complete exaggeration”, Éric Heyer of Sciences Po tells the Financial Times. At 2.9%, French ten-year yields are far below the 16% level that Greek bonds hit in 2011. Indeed, French borrowing costs are currently lower than Britain’s. Unlike with Greece, there is no doubt that European institutions will do “whatever it takes” to save France, says Andrew Kenningham of Capital Economics. Crisis-era Greece had a 15% deficit and plunging GDP, compared with a 6% deficit and modest growth in France today. Paris requires a relatively small fiscal tightening to sort out its budget. The problem is not so much economic as political – France seems “unable to give any government a mandate for deficit reduction”, leaving the issue of growing debt to fester.

The real risk for the eurozone will only come if Marine Le Pen’s far-right party takes power in a future election. While Le Pen no longer supports leaving the euro, her party will be “much less committed to cooperating with the EU” to keep the currency bloc functioning smoothly. If things do get out of hand, then expect the European Central Bank (ECB) to deploy its Transmission Protection Instrument (TPI), says Johanna Treeck in Politico. The TPI allows the ECB to buy up government bonds if it thinks bond markets have become “disorderly”. Yet the “bar for such intervention is high” – probably requiring French debt to hit somewhere above 200 basis points of spread over German bunds, compared with today’s 85 points.

What the crisis in France means for Macron

Macron has pledged to appoint a new prime minister within days and vows to stay in office until the end of his term in 2027. Macron has three bad options to resolve the political deadlock, says Pierre Briançon for Breakingviews. He could try to repeat the failed Barnier trick, appointing a “temperate centrist” willing to do budget deals with the far-left or far-right. Alternatively, he could pick a far-left or far-right administration, purely to demonstrate that the populists are also “unable to govern”. Finally, he could conclude that he himself is the problem and resign, plunging France into the uncertainty of a snap presidential election.

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