The fall of the French government threatens to cause a new euro crisis, the prime minister warns Michel Barnier and the European Central Bank.
After extremely difficult negotiations, the Barnier government tried to fix France’s badly deficit and indebted public finances with 60 billion euros in cuts and tax increases. The tax increases in particular caused anger in the opposition, and the minority government was overthrown in a vote of confidence on Wednesday.
The front line in bringing down the government was the left sided from the prime minister’s office and Marine Le Penin led by the far right. Now Le Pen and the left demand a president Emmanuel Macron break up.
According to the ECB, the French political risk has now become a real danger.
“Increased debt levels and large budget deficits combined with weak long-term growth potential and policy uncertainty increase the risk that the slippage of public finances will rekindle market concerns about the sustainability of government debt,” the ECB warned last week in its review of financial stability.
In the eyes of the ECB, the problem is especially that market interest rates higher than the zero interest rate period increase the debt service costs of France and also of all other euro countries. Government bonds that were issued cheaply in the 2010s now mature every year, and they have to be replaced by new ones with higher interest rates.
In practice, this means that governments must either raise taxes or find money elsewhere to pay the rising interest costs.