France’s Prime Minister Michel Barnier ponders during a session of questions to the government at the National Assembly in Paris, on December 3, 2024.
- It seems that the ramifications of a perceived "bad budget" are causing political casualties in a way that Europe will need to come to terms with for the foreseeable future.
- In the euro zone, post-pandemic fiscal rules are putting pressure on even the most hawkish EU members.
The French government once again stands on the brink of collapse, after Prime Minister Michel Barnier refused to bend to demands from right and left parties to make further concessions on the country's budget plans.
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He now faces a no-confidence vote on Wednesday afternoon, which he is nearly certain to lose.
Meanwhile, the German government is already on track for a snap election early next year, with its own no-confidence vote set to take place in the next few weeks.
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Even in the U.K., Prime Minister Kier Starmer and Finance Minister Rachel Reeves are under pressure just five months into the job, with disputes mainly centered around — you guessed it — the budget.
So why have national budgets suddenly become so contentious?
Money Report
In the euro zone, post-pandemic fiscal rules are putting pressure on even the most hawkish EU members.
France, Italy and Greece have long been seen as budget rule breakers. However, now Germany, Austria and the Netherlands are also falling foul of the EU's deficit rules that nations need to keep a 3% deficit ratio and a 60% debt ratio relative to their GDP.
The European Commission, the EU's executive arm, now judges a budget not just on its financial plans for the year ahead, but for the impact it has on the long-term trajectory of each country's deficit.
In Paris, Barnier's gamble to try to push through his 60 billion euros ($63 billion) of tax hikes and spending cuts by activating article 49.3 of the French constitution looks set to make him the shortest-serving French PM since 1958.
The political brinkmanship has driven French stocks lower, while pushing borrowing costs to highs not seen since the euro zone debt crisis of the last decade.
Over in Berlin, Chancellor Olaf Scholz made a surprise visit to Kyiv on Monday, pledging an arms deal worth 650 million euros with Ukrainian President Volodymyr Zelenskyy. The move raised eyebrows back in Germany, as the government's aid to Ukraine was central to the disagreements within the coalition.
The collapse of this government could have longer term ramifications for Germany's fiscal rules, with opposition leader Friedrich Merz saying he would consider reviewing the once-sacred borrowing rules.
There is more budget-related damage across the English Channel, where business confidence has dropped to the lowest level since the Covid-19 pandemic, and manufacturing has slowed down sharply since Reeves unveiled her tax-raising plans.
It seems that the ramifications of a perceived "bad budget" are causing political casualties in a way that Europe will need to come to terms with for the foreseeable future.
Goldman Sachs has slashed its growth forecast for the euro zone to 0.8% from 1.1% for 2025, highlighting the risks posed by President-elect Donald Trump's next term in office, but also citing "upward pressure on long-term bond yields from higher deficits," as well as "negative confidence effects from elevated geopolitical risks."
Edmund Shing, the global chief investment officer at BNP Paribas Wealth Management, highlighted that stagnation and instability are miring Europe just as the U.S. is gaining post-electoral clarity, with Trump set to re-enter the White House next month.
"That lack of political certainty at the core, at the heart of Europe, comes at probably the worst moment politically that it could come at," he told CNBC's "Squawk Box Europe" earlier this week.
