Euro Rates Steady After French PM Barnier Ousted

December 5, 2024 - Written by David Woodsmith

STORY LINK Euro Rates Steady After French PM Barnier Ousted

Barnier lost Wednesday’s no-confidence vote.

He is expected to stand down on Thursday and his controversial budget will be shelved.

The market impact has been contained and the euro is steady and at higher lows compared to November.

French PM Barnier was ousted on Wednesday by a vote of nonconfidence. He will stand down on Thursday and had this to say,

“This no-confidence motion … will make everything more serious and more difficult. That’s what I’m sure of.”

The first challenge for President Macron to find a successor, which is no easy task given the hung parliament and the divisions between the right-wing RN party and the left wing LFI. Indeed, there are calls for Macron to stand down too and the head of LFI is demanding an early presidential election to try and solve the crisis. A new government can’t be formed before July ‘25.

Barnier was pushed out due to his approach to the 2025 budget. In an attempt to narrow the problematic deficit, he proposed €20bn in tax increases alongside €40bn in public spending cuts. That was unpopular and blocked by the other parties. In an attempt to proceed, Barnier forced through the bill without a vote, a risky procedure as it triggered the no-confidence vote. Barnier may have hoped Le Pen and the RN might back him rather than be seen as causing instability, but his gamble did not pay off.

Le Pen said, “we had a choice to make, and our choice is to protect the French” from a “toxic” budget. The decision may come back to haunt Le Pen who has tried to appear less combative and capable of delivering a stable government.

The budget will now be binned and the previous conditions can be rolled over to next year. This is just kicking the problems further down the road and the markets may punish the French deficit and political chaos with higher yields on their debt. French yields have already risen sharply. As ING note,

“The public deficit will remain high, probably around 5.5% of GDP, the debt will continue to grow and the next government – whoever it may be – will have an even more difficult task in getting public finances back on track. Furthermore, the fall of the government means that political uncertainty will persist and continue to weigh on business and consumer confidence...”

To make things worse, public-sector strikes are organised and threaten to close schools and hit air and rail traffic. These are in response to separate cost-cutting measures and could cause chaos over the rest of the year.

Market Impact

Perhaps surprisingly, the euro held up well on Wednesday following the no-confidence vote. EURGBP dropped below 0.83 but has held higher lows with the November bottom of 0.826. Similarly, EURUSD remained at higher lows and held around 1.05. The pair is +0.15% in early trading on Thursday.

The main market impact has been on French yields and the problems for the euro may come later if France cannot control its budget. Indeed, it may be a case of all the bad news being out for the euro and already priced in as it has been weak for several months now. The near-term direction hinges on the ECB meeting in December and whether they will deliver a 50bps cut or a 25bps cut. It increasingly looks like the latter and that is a small positive for the euro.

There is some optimism that lower rates will lift the stuttering EU economy next year. So far, there is no sign of improved data and the only thing that has been lifted has been stock markets. Germany’s DAX exceeded 20,000 for the first time earlier this week.

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TAGS: Euro Forecasts