In the run up to the general election , attention was focused on the potential economic risk to Ireland from the election of Donald Trump as US president. But there are dangers closer to home, too, with euro zone growth weakening. And now France faces a potential budget crisis – and the risk of a government collapse – which would reverberate across the euro area.
Emmanuel Macron, the French president, nominated Michel Barnier as prime minister in early September following an inconclusive snap election in July. The challenges facing Barnier are formidable. Last June, the European Commission announced it was opening an excessive deficit procedure against France because of its high levels of public debt and fiscal deficit.
Barnier has proposed a package of €60 billion in spending cuts and tax hikes in the 2025 budget, which must pass by the end of the year. However, there is opposition to the measures from both left and far-right factions in the parliament.
The prime minister does not have the numbers to pass his budget and is playing a game of high-stakes poker. He has floated the idea of using article 49.3 of the constitution to push through the budget without a parliamentary vote. Opposition parties have threatened a no confidence vote in his government if he avails of this mechanism. Much will depend on the attitude of far-right leader Marine Le Pen – if her party supports a no confidence motion, then the government will fall and the budget will be abandoned.
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France could then be plunged into a fresh political crisis. Already its cost of borrowing has risen, an important sign of investor confidence, though it still remains just over 3 per cent. As it is the EU’s second biggest member state, uncertainty over its public finances could upset financial markets and trigger wider problems in the euro zone.
In the short-term, what will happen next in France may be clarified shortly. But there are wider issues too, with Germany arguing about budget policy and low growth in many euro markets. Ireland’s strong economy is an outlier, but will be affected, too, by euro zone tensions.