French Parliament Passes Emergency Law to Prevent Government Shutdown Amid Budget Crisis

Emergency Legislation to Avoid Shutdown
France‘s parliament has passed a special emergency law to ensure the continuation of essential government functions despite the absence of a 2025 national budget. The law, adopted by both the National Assembly and the Senate this week, grants the government the power to levy taxes and borrow money to fund core state functions. This measure comes as France awaits the formation of a new government under Prime Minister François Bayrou, who faces immense challenges in managing the country’s growing fiscal deficit.

Political and Fiscal Challenges Underpin the Law
The law is a direct response to France’s mounting budgetary crisis, compounded by the country’s debt reaching an estimated 6% of GDP in 2024. Bayrou’s new government is under pressure from both the European Union and global financial markets to address these financial vulnerabilities. While the passage of the emergency law ensures immediate operational continuity, the broader budgetary challenges remain unresolved, and Bayrou’s priority will be negotiating the 2025 budget, expected to begin in January.

Political Stalemate Over Budget Cuts and Tax Hikes
The path to fiscal stability has been complicated by fierce political opposition. The French government’s attempts to address the deficit were thwarted when former Prime Minister Barnier’s proposed budget cuts, including €60 billion in tax hikes and spending reductions, were rejected by both far-right and left-wing factions. This political gridlock highlights the difficulties Bayrou will face in pushing forward reforms that satisfy both the EU’s fiscal requirements and the competing political interests in the country.

Economic Impact and Investor Concerns
The political turmoil and lack of a clear fiscal strategy have sent ripples through France’s financial markets. Following Moody’s downgrade of seven major French banks, the country’s banking sector saw a significant drop in stock values. Furthermore, government bonds and the French stock market also experienced sell-offs, signaling investor unease over the ongoing political instability and the lack of clarity on France’s long-term economic plans.