French President Emmanuel Macron delivers a televised New Year's address to the nation from the Elysée Palace in Paris, December 31, 2024.
Kiran Ridley | Af | Getty Images
As France enters the new year, there is little hope that the political and economic uncertainty that has plagued the euro zone's second-largest economy for months will dissipate in 2025.
France was plunged into a political crisis last summer when early parliamentary elections called by President Emmanuel Macron produced an inconclusive result, with both far-left and far-right parties topping polls.
Amid internal conflicts over who should govern, Macron installed a centrist, conservative government that proved short-lived, and disputes over France's 2025 budget sowed the seeds of his downfall – at the hands of the far left and far right – in a vote trust in December.
A new minority government is now in place, but it faces the same challenges as before – how to convince political rivals in the French National Assembly to agree to 2025 spending and tax plans that will reduce France's budget deficit, which is forecast to reach 6.1 % in 2024, and a debt of 112% of gross domestic product, both well above EU regulations.
France's political defeat continues to shake financial markets and raise concerns among economists: Moody's rating agency downgraded France's credit rating last monthwarning that political fragmentation is “more likely to hinder meaningful fiscal consolidation” and that the country's public finances will be “significantly weakened in the coming years.” While most European markets managed to achieve profits in 2024, the French market CWC 40plagued by political turmoil, decreased by 2.2% during the year.
Macron admits his mistake
While Macron has defied calls to resign and refused to hold early presidential elections, he appeared on Tuesday to acknowledge that his decision to hold early voting last year created more problems than solutions for France.
“We are also dealing with political instability that is not specific to France, we also see it among our German friends who have just dissolved their Assembly. But it rightly worries us,” Macron said in his New Year's speech.
“I must admit tonight that the dissolution (of parliament) has so far brought more divisions in the Assembly than solutions for the French,” he added.
French President Emmanuel Macron delivers a televised New Year's address to the nation from the Elysée Palace in Paris, December 31, 2024.
Kiran Ridley | Af | Getty Images
“If I decided to disband, it would be to give you a voice, regain transparency and avoid the immobility that threatened. However, clarity and humility require us to recognize that at this time this decision has caused more instability than calm, so I fully take this responsibility into account.”
The economy is facing a “difficult winter”.
No one is underestimating the challenge, with new Prime Minister Francois Bayrou stating when he took up his new role in December that France faces a “Himalayan” task when it comes to fixing its deficit and debt problems and healing political divisions.
Economists and analysts agree.
“The French economy faces a difficult winter, with economic activity likely to stagnate and a recession not excluded,” Charlotte de Montpellier, senior economist for France and Switzerland at ING, said in an emailed analysis last month.
“While we can hope for a slight recovery when – and if – the political situation becomes clearer, this will not be enough to significantly stimulate French activity in 2025. We therefore continue to expect GDP growth of 0.6% in 2025. , compared with 1.1% in 2024 – a figure lower than most of the institute's official forecasts,” she noted, adding that the risks France faces are currently unfavorable.
Andre Sapir, a senior fellow at Brussels-based think tank Bruegel, believes the new government will make slow progress.
“Basically, the new government has the same task as the previous, very short-lived government, which is to try to plug part of the budget hole… It won't be very easy, but I think the life of this government may be longer than the previous one,” he told CNBC “Squawk Box Europe.“
“I think the only way to understand what is happening in France is not to use an economic perspective. Yes, there are many economic issues that need to be addressed, including the budget, but the game at stake is about the next presidential election, so everyone is preparing for the elections that are scheduled to be held in 2027, but some parties they want it to happen earlier, so they are pushing to create a bigger crisis, and others are trying to buy time,” he noted.
“In a sense, you could say that France is ungovernable, and that's actually why I don't expect much progress on the budget, or rather the minimum that (parliament) can pass.”
Early elections?
Sapir believes that if Bayrou's new government is toppled in a new vote of confidence, calls for Macron's resignation could intensify.
However, he noted that there is a division between various political parties on whether early presidential elections would be beneficial to their interests.
Sapir noted, however, that the 2025 elections, which will feature both Jean-Luc Melenchon, head of the far-left party France Unbowed (La France Insoumise), and the far-right National Rally (Rassemblement), may be preferred for the far left and the far right. Nationale), a figurehead of Marine Le Pen, who is counting on her chances in the early vote.
“A lot of other people don't want either Le Pen or Melanchon (in power), so they won't want elections in 2025, so that's really what's at stake in my opinion. For Le Pen and Melanchon – 2025 would be the perfect time.”