France’s 2025 budget crisis: Barnier invokes Article 49.3 – What now?

French PM Michel Barnier has invoked Article 49.3 to pass budget measures without parliamentary approval, risking a no-confidence vote. Opposition, led by Marine Le Pen, demanded the indexation of pensions to inflation. Markets react with bond spreads widening and CAC 40 falling.

French Prime Minister Michel Barnier has invoked Article 49.3 of the Constitution to force through controversial draft budget measures without parliamentary approval, escalating political tensions and all but guaranteeing a no-confidence vote in the coming days.

The move highlights Barnier’s struggle to govern without a majority in the National Assembly. By bypassing a direct vote on the budget, Article 49.3 allows the Prime Minister to push the legislation forward but empowers opposition parties to table a motion of no confidence.

Marine Le Pen’s far-right National Rally (RN), which holds a pivotal role in the fractured legislature, is expected to spearhead the effort to unseat the government.

Last-Minute concessions fail to appease opposition

Before invoking Article 49.3, Barnier attempted to placate the RN with a series of concessions. He announced that planned cuts to the reimbursement rate for medicines – initially set at 5% – would be scrapped, reportedly following a conversation with Le Pen.

These measures followed earlier concessions, including abandoning plans to increase electricity taxes and reducing state-funded medical aid for undocumented migrants.

However, Le Pen has made it clear that these moves are insufficient and reiterated her demand for the full indexation of pensions to inflation.

Article 49.3: A Constitutional gamble

The invocation of Article 49.3 underscores the high-stakes political and fiscal crisis Barnier’s minority government faces as it struggles to pass the 2025 budget, which aims to reduce France’s burgeoning national deficit.

While the mechanism allows the government to bypass a parliamentary vote, it also exposes Barnier’s administration to a no-confidence motion. Le Pen has hinted that her party would support such a motion unless its demands are fully met, adding to the pressure on the Prime Minister.

If Barnier survives the no-confidence vote, he will emerge politically weakened, with the concessions already made raising the projected deficit and further eroding confidence in his administration. However, if the motion succeeds, Barnier’s government would collapse, marking the first such event since 1962. In that scenario, President Emmanuel Macron would be forced to appoint a caretaker government, while it is likely that emergency measures would be introduced to manage the fiscal impasse

Economic Impact: Deficit and growth at risk

The fiscal and political turmoil is raising alarm among economists.

Alexandre Stott, economist at Goldman Sachs, warned that the concessions made to appease the RN could push the 2025 budget deficit to 5.5% of GDP, up from the initial target of 5%.

“The government is likely to face several confidence votes between December 4 and 20,” Stott wrote in a weekend note. He further warned that France’s medium-term fiscal outlook remains “challenging”, with a significant course correction unlikely until the next presidential elections in 2027.

Stott also highlighted the adverse effects of political uncertainty on consumer and business confidence. Goldman Sachs has downgraded its GDP growth forecast for France in 2025 to 0.7%, below the consensus of 0.9% and far below the government’s projection of 1.1%.

Michel Tukkier, rates strategist at ING, echoed the sentiment, stating that the weakening French economy makes fiscal consolidation “seemingly impossible”.

He noted that the country’s long-term outlook has deteriorated in recent months, with growing challenges in both economic management and political stability.

Market reactions: Bond yields surge, CAC 40 falls

The budget standoff is already rattling financial markets. On Monday, the yield on France’s 10-year sovereign bond surged to 2.89%, while the equivalent German bond yield fell to 2.05%, pushing the spread between the two to 84 basis points.

This marked the widest spread since September 2012, during the eurozone sovereign debt crisis, reflecting heightened investor anxiety over France’s fiscal trajectory and political gridlock.

The CAC 40 index, France’s benchmark stock market, fell 0.5% on Monday, underperforming other eurozone markets, as investor sentiment continued to sour.

What’s next?

As opposition politicians prepare to table a no-confidence motion, the coming days will determine the fate of Barnier’s government. If he survives the motion, his administration will continue but face mounting political and economic challenges.

If the government falls, France will enter a period of political uncertainty, with emergency constitutional measures likely to be required to manage the 2025 budget. Meanwhile, the escalating crisis highlights the broader challenges of fiscal consolidation and economic recovery in an already fragile French economy.