Make France Governable Again

By Elwin de Groot, Benjamin Picton and Maartje Wijffelaars, strategists at Rabobank

• What we are looking for: A Prime Minister of the Fifth French Republic.

• Who we are: The second largest economy in the Eurozone and the only nuclear power in the Eurozone; we are Europe-minded, but fundamentally weak, with a budget deficit that is more than twice the threshold set by Brussels. Our political landscape and parliament are divided into three blocs: far-left, centre and far-right. There is little room for compromise between them.

• Our mission: to stay economically relevant and keep our economy afloat, whilst ensuring sustainable finances over the medium-term. Although our spread has widened, markets have largely been treating us as ‘too big to fail’; we would like to keep it that way.

• You are: someone with relentless energy and who is able to bridge those said divisions; alternatively, you are able to drive a wedge into either the bloc on the right or left in order to fracture the opposition and force compromises. You like numbers, budgets and have a Machiavellian way about you.

• We offer: an opportunity without much of an upside.

Bitcoin surged through the $100,000 level following an announcement from Donald Trump that he had nominated Paul Atkins to replace Gary Gensler as Chair of the Securities and Exchange Commission. Atkins is well regarded in Republican circles, having been previously appointed by George W. Bush as SEC Commissioner from 2002 to 2008. Trump’s announcement post on Truth Social promoted Atkins’ crypto chops, saying that he “recognizes that digital assets & other innovations are crucial to Making America Greater than Ever Before.”

While Trump continues to assemble his team to Make America Great Again, Emmanuel Macron is now faced with the difficult task of finding a new PM to make France governable again. Michel Barnier sensationally lost a no confidence vote in his 3-month premiership yesterday after Marine Le Pen’s National Rally sided with left-wing parties to bring down the government.

The fall of the French government was clearly already in the price, because EURUSD was largely unchanged on the day. OATs outperformed Bunds as the French sovereign curve bull steepened. The CAC40 gained 0.66%, but underperformed the Euro Stoxx 50 (+0.83%) and the German DAX (+1.08%), while the FTSE100 closed in the red and US indices again hit fresh all-time-highs. This morning, France’s spread opened several basis points tighter again, confirming that Macron still has the benefit of the doubt. But time is unlikely to be Macron’s friend. Moody’s said this morning that the French no-confidence vote is “credit negative”.

Looking ahead, there are multiple scenario’s to think of. Remember that the President can only dissolve the Assembly once a year, which means the French will have to work with the existing distribution of parliamentary seats until June 2025.

The scenario preferred by the opposition is for Macron to give up his post and call for early presidential elections – they are officially due in 2027. We don’t see this as a likely scenario, at least not until after March, when Le Pen looks set to be convicted over the misuse of EU funds, which would ban her from politics for five years. The reason why we don’t see Macron opting to resign before is because it would almost certainly pave the way for a Le Pen victory and subsequently a far-right prime minister. It would not change the parliamentary distribution in the near future, and hence would require support from centrist of left-wingers to push through a budget, which seems difficult to imagine at this point. But, crucially, Le Pen would then call for early parliamentary elections in July, where her party RN would have a real shot at winning, given that they won the popular vote this year. In any case, it would deliver a more conservative and Eurosceptic France, with limited to no intention to reform the unsustainable pension system and, ostensibly at least, less sense of urgency to substantially cut back the deficit and stabilise its massive and growing debt burden. Moreover, to protect pensioners, an important voter base, it could even lead to higher pension spending. If RN would actually care about fiscal consolidation this could then lead to spending cuts and higher taxation elsewhere, more detrimental to France’s longer-term growth outlook. In short, it might then be less detrimental to France’s short-term growth outlook, but more so to its longer-term one.

A second scenario would see the installation of a broker prime minister than would be able to find consensus over a budget. Such a consensus could only be reached, in our view, however, if the budget contained less spending cuts and/or fewer tax increases, to protect pensions. Indeed, Barnier’s proposal to save money on pension spending by delaying inflation indexation, by half a year, appeared to be a red line for Le Pen’s RN. Calculations differ as to the amount it would save, but it’s generally estimated at up to EUR 4bn. This seems hard to be found elsewhere, without harming the economy. A budget without these cuts might be slightly beneficial to the short-term growth outlook, but negative for the fiscal trajectory. Remember, France already spends much more on pensions than most other OECD countries (13.6% of GDP versus 7.7% on average in the OECD) and the national pension council has projected that the pension fund will be in deficit as from this year. It would also likely lead to a problem with Brussels further down the line, as it would imply that the budget won’t adhere to the reformed budget rules. A potential clash would likely be delayed until autumn next year, though, or perhaps the spring of 2026, when realised figures actually show France is off track.

A third, and perhaps most probable option is the installation of a caretaker government which has to rule based on emergency spending and taxation laws, until new elections will be called. This is a scenario that has never been tested. A government of this nature could be led by an independent, non-partisan figure to avoid any evident political biases. Whilst this is a short-term solution to keep the lights on in France and might save some economic pain due to less austerity, it is not very likely to lead to any structural improvements to either the public finances or Frances’ structural economic growth potential. Moreover, it would simply kick the can down the road. New elections in the year after would introduce a similar uncertainty as that of the past months. The fact that RN managed to secure the popular vote in July’s election, but didn’t manage to win that many seats, shows that they were very close to winning big.

Turning to the US, the ISM services report yesterday surprised on the softer side to print at 52.1 vs 56 previously. The ‘employment’ and ‘new orders’ sub indices both fell, but remain in expansion territory. ‘Prices paid’ rose from 58.1 to 58.2, which perhaps raises the stakes a little on tomorrow’s non-farm payrolls report for determining the outcome of the December FOMC meeting.

Speaking of the FOMC, Fed Chair Jerome Powell gave an interview with Andrew Ross Sorkin that yielded little in the way of fresh guidance for the upcoming meeting. When asked about why the Fed was cutting despite stickier inflation and a strong economy, Powell said “we can afford to be more cautious to find the neutral rate”. Mary Daly struck a similar tone on PBS News Hour, saying that there is “no sense of urgency” about cutting rates. A 25bp cut in December is currently 74% priced into the OIS strip. Our Fed watcher Philip Marey, for now, sticks with his view of a 25bp cut.