Despite the government's ouster in France's political crisis, Paris still faces its own set of challenges.

• The fall of French Prime Minister Michel Barnier's government on Wednesday night marked the culmination of several months of political turmoil in France.
• The end of Barnier's brief tenure as premier and his government marks the beginning of a new era of political instability and uncertainty in Paris.
• A no-confidence motion to remove him from power is backed by 331 lawmakers from the leftwing New Popular Front (NFP) alliance and the far-right National Rally (RN).
• On Thursday morning, Barnier resigned, leaving President Macron to urgently find a replacement.

The fall of French Prime Minister Michel Barnier's government on Wednesday marks the culmination of several months of political turmoil in France, as opposition parties from both the left and far right unite to bring down the government through a no-confidence vote.

The end of Barnier's brief tenure as premier and his government marks the beginning of a new era of political instability and uncertainty in Paris, according to analysts and economists.

Hours after the no-confidence vote against his government, which was supported by 331 lawmakers from the leftwing New Popular Front (NFP) alliance and the far-right National Rally (RN), Barnier resigned Thursday morning.

The vote, which took place after weeks of debate over the 2025 budget plans to increase taxes and reduce public spending, was not a close call. The number of deputies supporting the motion was significantly higher than the 288 required for the motion to pass in parliament, the National Assembly. This marked the first time a French government has been overthrown since 1962.

The political crisis that began with President Emmanuel Macron's decision to call snap parliamentary elections earlier this year ultimately led to the ousting of Barnier.

The move to hold elections in June and July backfired on Macron, resulting in a reduced power base for his Ensemble centrists and a National Assembly divided into three factions, with empowered leftwing and far-right groups, ready to target Barnier, the prime minister Macron appointed in September.

President Macron is under pressure to quickly find a replacement PM, with Reuters reporting that he wants someone in place by Saturday, when dignitaries, including US President-elect Donald Trump, are gathering in Paris for the Notre Dame Cathedral re-opening.

The next candidate is likely to encounter the same issues that Barnier faced with both the left and right pressuring the new government to prioritize their own agendas for the 2025 budget, just as they did with Barnier.

A new era of political instability is dawning in France, according to Charlotte de Montpellier, senior economist of France and Switzerland at ING, in a note issued Wednesday.

Finding a new prime minister who will not face a motion of no confidence directly will be a very difficult mission for President Emmanuel Macron, given the highly polarized and divided National Assembly into three main camps – left, centre-right, and far-right.

She stated that it is likely that France will be without a government for several weeks, if not months.

Who could be the next PM?

It is rumored that Macron may choose his ally, Defense Minister Sébastien Lecornu or the seasoned centrist leader François Bayrou, who heads the French member party Mouvement Démocrate, as his candidate for the post. Other potential candidates mentioned include Interior Minister Bruno Retailleau and former Prime Minister Bernard Cazeneuve.

According to Mujtaba Rahman, managing director of Europe at Eurasia Group, whoever takes on the job may not succeed in the role or be expected to do so.

Rahman stated in a note on Wednesday that his first job will be to push through a 2024 budget rollover, and his second will be to attempt to revive Barnier's deficit-cutting 2025 budget with amendments that may appeal to the left or the far right or both, which is arguably an impossible task.

It is believed by analysts that Macron will select a replacement for Barnier in the near future, but they note that the new premier's tenure could essentially serve as a temporary solution until the next parliamentary elections, which are scheduled for July 2022, one year after the last election.

"The political crisis in France, which has been the deepest and most complex in the past six decades, will persist next year, according to Rahman. He cautioned that the conflict between the three opposing groups in the National Assembly will continue for an extended period, with no immediate hope of reaching a consensus on a new budget for 2025."

The probability of fresh parliamentary elections occurring next year, according to Eurasia Group's new base-case scenario, is 75%.

It is predicted that France's major political parties will likely approve a provisional budget for 2024, which will essentially extend the current budget into the next year. This will prevent any potential government shutdown in the new year, as France will continue to meet its financial obligations.

Delaying the budget deficit by rolling over the budget may temporarily prevent a crisis, but it also postpones addressing France's fiscal problems, as the budget deficit is predicted to reach 6.1% of GDP in 2024 and is expected to increase further if no action is taken to control spending.

Markets calm, for now

The French government's fall seems to have been accepted by investors, as France's 10-year government bond yield remained stable at around 2.9% on Thursday, despite a week of rising borrowing costs that reached the same level as Greece's.

IG Markets' chief market analyst, Chris Beauchamp, stated on Thursday that the markets may not remain stable if President Macron's opposition calls for his resignation and an early presidential election become a reality, although this is considered an unlikely occurrence.

A new caretaker will be appointed quickly, but there is no solution to the budget impasse. Markets are currently stable, but if the Far Left and Right manage to remove Macron as president, we can anticipate a new wave of uncertainty in French yields, the CAC40, and the euro.

The extension of the 2024 budget to 2025 implies a less restrictive fiscal policy in terms of tax revenues and public spending, as planned.

The Barnier government's promise to achieve a public deficit of 5% of GDP by 2025 is unattainable, as the deficit is expected to remain high at approximately 5.5% of GDP. As a result, the debt will continue to increase, and the next government, regardless of who it may be, will face an even greater challenge in bringing public finances back into balance.

"Although budgetary policy may become slightly less restrictive, political uncertainty will persist and continue to affect business and consumer confidence due to the fall of the government."

ING predicted that France's economy would grow by 0.6% in 2025, down from 1.1% in 2024. However, the instability may cause a downward revision, especially if bond yields rise further due to the current political turmoil.