Enhancements Implemented by the Commission to Boost System Productivity
France has been experiencing a tumultuous political landscape since mid-2024, with three different governments leading the country in less than a year. The latest shake-up occurred last Monday evening, when Prime Minister François Bayrou lost a confidence vote in parliament and resigned from his post as head of the minority government after less than nine months in office.
Bayrou's tenure was marked by plans to implement austerity measures aimed at saving billions annually. These measures included cutting public holidays, reducing the number of civil servants, merging government agencies, freezing public spending, including pensions and social benefits. However, these proposals faced strong protests and raised concerns about the impact on the economy and society.
The economic instability in France has not gone unnoticed, with the European Central Bank (ECB) being speculated to support France with bond purchases due to growing concerns about France's debt. The country currently holds the highest debt in the European Union, amounting to around 3.3 trillion euros, and its debt-to-GDP ratio of 114 percent is the third highest, after Greece and Italy.
These factors led to the EU opening a deficit procedure against France in July 2024 due to France's budget deficit exceeding the 3 percent limit set by the European Union's Stability and Growth Pact. The agency also expressed doubt about the success of economic reforms due to France's political polarization and instability.
The downgrade of France's creditworthiness from AA- to A+ by Fitch is a reflection of these concerns. The downgrade is likely to exacerbate the situation for new borrowing in France, as risk premiums for French government bonds have risen significantly, and the yield on ten-year bonds is above that of Greek bonds.
Eric Coquerel, a member of the political party La France Insoumise, warns that relying on financial markets to impose a harsh austerity policy could further plunge the country into economic, social, and ecological crisis. New Prime Minister Sébastien Lecornu has announced that he will bridge the gap between the political situation and the expectations of citizens.
As France navigates through these challenging times, it remains to be seen how the new government will address the country's economic woes and restore confidence in its financial stability.
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