President-elect Trump met with Prince William in Paris on Saturday, after the two attended the re-opening ceremonies of Notre Dame Cathedral.
FRANCE – President-elect Trump’s visit to France on Saturday for the re-opening of the Notre Dame cathedral in Paris might give people a moment to forget the present economic doldrums facing the country.
Indeed, France’s prime minister, Michel Barnier, stepped down on Wednesday, just 90 days after taking the job last September. It marks the shortest tenure in the republic since 1958.
Now the country has no fiscal budget for next year, no government, but it does have a lot of anxiety about what happens next politically and economically. And the law prevents another general election before next July.
While the news shocked the public, those who closely watch the French parliament say it was inevitable. The issue came down to the huge political divisions between the elected parties in the legislature. “We knew there was no way to form a stable government from the start,” Leo Barincou, a Paris-based senior economist at Oxford Economics, told FOX Business.
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French president Emmanuel Macron shakes hands with President-elect Trump at the Elysee palace on Dec. 7, 2024, in Paris. (Remon Haazen / Getty Images)
The plot to oust the incumbent prime minister came after Barnier tried to pass a fiscal budget that would raise 60 billion euros ($63 billion), including increasing the tax on already pricey electricity. Part of the goal was to reduce France’s massive debt load, which is now 111% of GDP, up from 59% in 2001.
That prompted a parliamentary vote of no confidence, which Barnier lost, with 311 legislators voting against the prime minister out of 577 members of parliament.
Philppe Lacoude, a U.S.-based French economist, told FOX Business the huge increase in debt over decades has meant the government can no longer afford to distribute the free goodies to its citizens who have become addicted to it. “This has fueled immense resentment,” he says. “You have to be crazy to own even one euro of French public debt: it is the equivalent of making a loan to an insolvent destitute person who has reduced his annual working time from 1993 hours [a year] in 1970 to 1501 hours today.”
Prime Minister Michel Barnier speaks during a no-confidence debate at the National Assembly in Paris on Wednesday, Dec. 4, 2024. (Nathan Laine/Bloomberg via Getty Images)
With Barnier out, and so far, no sign of a new prime minister, investors and business executives are concerned about what the future will bring. As always, business leaders loathe uncertainty. “It is hard to plan when you don’t know what will happen with taxes and regulations,” Barincou says. “Hiring on hold across France’s business world in general.” On top of that, it looks like government tax cuts will be off the table for a while, and possibly higher ones planned, he says.
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As President-elect Trump visited France on Saturday, rubbing elbows with Prince William and French President Emmanuel Macron to celebrate Notre Dame’s re-opening, there is no doubt the threat of tariffs on French exports to the U.S. looms large. That could come alongside a weak French economy that will likely barely reach above 1% this year.
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Neighboring Germany, the largest economy in Europe, will feel the same as France. It is facing a constitutionally mandated rule that requires it to cut spending to reduce its debt level, and its economy is suffering from brutal competition from China for the export of engineered machinery. Germany is also politically shaky now. It’s holding a general election in February next year following Chancellor Olaf Scholz’s firing of his finance minister.
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Even without U.S. tariffs, the economic and political situation in France and Germany will likely send the value of the euro down. “We are seeing Europe’s weakness in the face of strength in China and the U.S.,” Marc Chandler, chief market strategist at Bannockburn Global Forex told FOX Business. “We won’t see change today, but economists are cutting their currency forecasts for the euro.” He sees a 10% drop in the euro to 95 U.S. cents buying a single euro in as few as six months.
Due to the ongoing war in Ukraine, both France and Germany will also be highly concerned about Trump’s threats to ditch NATO countries that don’t spend enough on defense. Germany had a decades-long period when it didn’t meet its 2% of GDP contribution. France was modestly better. Still, both have debt burdens that prevent much more spending.
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Trading data on digital boards at the Euronext NV stock exchange in Paris on June 18, 2024. ( Nathan Laine/Bloomberg via Getty Images)
However, not everyone is panicked by the sudden government changes and fiscal crunch. Some see a real chance that the “crisis” could lead to better government. “Trump’s potential tariffs and concerns over defense spending could trigger taking steps to adapt fiscal policy,” Konstantinos Venetis, director of global macro at TSLombard, told FOX Business. “It could be used as a tool to jump-start the European economy with necessity being the mother of invention.”
At the time of writing, France’s President Macron says he’ll appoint another prime minister within days. However, it is still not clear whether the new incumbent will manage to make any progress on achieving a parliamentary consensus.
