The French government will face consequences if it does not negotiate on the budget, warns the far right.

• The far-right National Rally party in France stated that the possibility of a compromise on the 2025 budget is becoming less likely, which could lead to a political upheaval in the near future.
• The conservative minority government, led by Michel Barnier, has refused to make concessions to the National Rally (RN) on the budget, which includes 60 billion euros ($63 billion) in tax hikes and spending cuts.
• If there is no breakthrough on Monday, it is highly likely that the leftwing New Popular Front (NFP) alliance will receive support for a no-confidence vote.

The National Rally party has set a deadline of Monday for the government to agree to new concessions regarding the 2025 budget, otherwise it will vote against the government in a no-confidence vote.

The National Rally (RN), led by Marine Le Pen and Jordan Bardella, has not been successful in obtaining most of its budget demands during negotiations with Prime Minister Michel Barnier regarding the next year's budget, which includes 60 billion euros ($63 billion) worth of tax increases and spending reductions.

If there is no breakthrough on Monday, it is highly likely that RN will support a no-confidence vote that the NFP alliance has already drafted against the minority government led by Barnier since September.

If Barnier's government uses special constitutional powers to force through the budget bill, the leftwing bloc plans to table a no-confidence motion, which would see him overriding opposition from both the left and right in the National Assembly, France's parliament.

According to Agence France-Presse, Le Pen stated on Sunday that the government had effectively ended discussions on the budget, leaving Barnier with the option of making new concessions or facing a potential fall in a confidence vote.

The National Rally (RN) claims that the budget will decrease the purchasing power of the French people and demands tax concessions on hikes that will affect households and businesses. The party's demands include increasing pensions in line with inflation in January and increasing support for small businesses. The prime minister has already dropped plans to increase electricity tax and on Monday, he abandoned plans to reduce medication imbursements.

RN President Bardella stated on Monday that the party is likely to support a no-confidence motion against the government unless there is a sudden change of events.

If France's political turmoil escalates and Barnier's government falls, it is uncertain what will happen next. New parliamentary elections cannot be held until June 2022, a year after the last snap election called by French President Emmanuel Macron, which resulted in less political stability.

The political instability in France is causing concern among money markets about how it will affect the euro zone's second-largest economy, which is struggling with a debt pile and budget deficit that is projected to reach 6.1% in 2024. In 2023, French public debt exceeded 110% of GDP.

Since 1974, France has consistently failed to balance its budget, despite the EU's rules requiring countries to keep their budget deficits within 3% of GDP and their public debt within 60% of GDP.

Last week, France's financial markets were hit with a brewing crisis as the country's borrowing costs reached the same level as Greece's for the first time on record.

According to analysis by Holger Schmieding and his team at Berenberg Bank, France is heading in the wrong direction economically, and the government must take immediate action to correct its unsustainable fiscal policy. The National Rally party now holds significant influence over the government, making it more difficult to implement necessary changes.

In emailed comments, they pointed out that Le Pen must navigate a politically strategic path in the near future.

Risky for Le Pen to present herself as the guardian of ordinary people by opposing Barnier's tax hikes and spending cuts.

If she causes a financial crisis with a spike in bond yields and possibly a French recession, she could be seen as an agent of chaos rather than a responsible leader, which could damage her chances of winning the presidency in 2027, they noted.

The calculus indicates that Le Pen may attempt to reach a compromise with Barnier, thereby preventing a political and financial crisis in France this Christmas, according to the note.

Trouble, whatever happens?

Despite the possibility of a last-minute passing of the 2025 budget, economists predict that it will only provide a brief relief from France's ongoing fiscal difficulties.

If the minority government agrees with National Rally on the 2025 budget and passes it, markets will experience some relief. However, this would not solve France's significant budget deficit and debt problems, which require years of substantial fiscal tightening to achieve a primary surplus, according to Mike Gallagher, director of macroeconomics and strategy at Continuum Economics, in a note on Monday.

The ECB predicts that France's debt servicing costs will surpass 4% by 2034 due to the end of ultra-low interest rates, which could lead to a significant and persistent debt crisis. However, it is unlikely that there will be any further multi-year fiscal tightening before the next parliamentary election in July 2025 and the presidential election in 2027. France requires a high-risk premium to reflect political issues, insufficient progress on fiscal consolidation, and the possibility that non-residents may reduce their massive holdings (53% of outstanding debt).

If the budget does not pass, Europe's financial markets will experience increased volatility, according to Gallager.

The French-German bond yield difference could increase from 80 to 150 basis points, prompting the European Central Bank to intervene and stabilize markets.

If French turmoil significantly impacts the euro zone growth outlook, the ECB may need to adjust its monetary stance by cutting rates more than planned.

Nevertheless, it is unlikely that the ECB will directly support France with bond purchases, as the ECB has no obligation to shield France from the consequences of failing to pass a budget. France must take responsibility for its actions and possibly reconsider its opposition to fiscal consolidation, either through the centre-left or Le Pen, Berenberg's economists stated.