Euro Steady vs Pound, Dollar Despite French Political Crisis

December 4, 2024 - Written by Frank Davies

STORY LINK Euro Steady vs Pound, Dollar Despite French Political Crisis

French politics have been unsettled ever since the election, but there is now a high risk the coalition falls apart.

PM Barnier pushed through his controversial budget but now faces a no confidence vote on Wednesday evening.

The euro has stayed steady even while French yields have climbed. Will Le Pen trigger a fresh crisis?

Despite some relative weakness on Monday, the euro managed to hold higher lows against the major G7 currencies. EURUSD steadied around 1.05, and while EURGBP dipped below 0.83, it made a higher low with the November low of 0.826. This is a positive sign as the situation could hardly get worse for the euro.

No Confidence Looms for Barnier

The euro has been weighed down by multiple sources in 2024. Much of it stems from the sluggish EU economy which has struggled to grow and has a manufacturing sector in contraction. This has forced the ECB into a quick succession of rate cuts.

Recent events have not helped the situation as the threat of tariffs from President elect Donald Trump could hurt exports, especially in the auto industry. The ECB plan to cut rates further, but this is not a quick fix and many economies need fiscal help. The problem is, some countries like France are unable to do that due to budget constraints, while others like Germany have weak governments who can’t pursue strong fiscal spending plans.

Political uncertainty has reached new heights in recent days as the French PM Michel Barnier will face a no confidence vote on Wednesday evening. This comes after Marine Le Pen’s RN party blocked certain aspects of the 2025 budget and he used a special constitutional measure to push it forward without a vote. The only problem with taking this step is that he will now face a no-confidence vote. There is a real risk Barnier will be forced out and this would cause several problems for the markets.

The first is obviously more political uncertainty at the heart of the EU. The coalition was always fragile but at least it was functional. Finding a new PM approved by all sides could be a challenge.

The second problem is how to resolve the budget issue. As The Guardian explains,

“...the prime minister’s principal objective was to restore France’s disastrous state finances – including a 2023 budget deficit of 5.5% of GDP that was projected to rise yet further to 6.1% of GDP this year, almost twice the maximum allowed in the eurozone. The government’s draft 2025 budget features €20bn (£16.5bn) in tax increases alongside €40bn in public spending cuts.”

Obviously, higher taxes and spending cuts are unpopular, and is why the RN were against the budget, but they are deemed necessary by markets. French debt could be downgraded and yields could continue higher if the budget deficit is not addressed now. Already French yields are comparable to those in Greece. The risk is that nothing is done and French slides further into trouble.

“If parliament has not adopted the budget by 20 December, the caretaker government could propose special emergency legislation to roll over spending limits and tax provisions from this year. But that would mean that savings measures Barnier had planned would fall by the wayside,” continue The Guardian.

The euro has been relatively stable against this troubling backdrop, but Wednesday’s vote is still a potential source of volatility. If Barnier is outed, EURGBP could break to new 2024 lows. That might be a gamble for Le Pen as the political crisis that would follow would be her responsibility. Markets perhaps think she will maintain the status quo.

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TAGS: Euro Forecasts