From Paris to Frankfurt: ECB’s response to France’s political turmoil

While European lawmakers were coming to terms with the ramifications of the political uncertainty in Germany, France’s government collapsed last week following a vote of no-confidence in the country’s Prime Minister over a budget dispute. The political vacuum in the two largest economies in Europe would potentially require sustained monetary policy support from the ECB in a year where growth and economic activity in the EU has remained sluggish.

France’s Political Crisis

France has been rocked by a no-confidence vote (over a budget dispute), a rare event that hasn’t occurred in over six decades. This move, driven by a coalition of far-right and left-wing parties, has left the country in a state of political limbo.

French President Emmanuel Macron now faces the task of appointing a new Prime Minister who can secure parliamentary support in the lower House to pass a stopgap spending bill before the year end. This could be an arduous task, given it was Barnier’s budget bill, which contained EUR 60 billion of tax increases and spending cuts to rein in the deficit to the EU regulation of 5% of GDP, which effectively sank his tenure.

The last time Macron had to pick a Prime Minister (following the snap Parliamentary elections in July), it took nearly two months before Barnier was accepted by a slender majority. This time, however, things may need to move much quicker as the new Government would need to pass a stopgap spending bill in a divided parliament before year end or find suitable alternative measures to keep the country running.