And while we should be proud of our democracy, the more often national governments fall, the stronger the signal that something is structurally wrong. The number of prime ministers isn’t the cause of instability – it’s a symptom. It suggests that something in the economy and/or society is in need of repair. In France’s case, it’s the unresolved dilemma of how to reconcile rising government debt and ageing populations with the urgent need for investment and structural reform. Whatever the next hours, days, or weeks bring in French politics, a solution to this dilemma doesn’t seem close.
As a result, expect political instability and uncertainty to leave their mark on the economy, pushing the eurozone’s second-largest economy closer to stagnation. Still, this isn’t a return of the euro crisis. It’s a domestic political and, probably soon, an economic crisis. Direct contagion to other eurozone countries looks unlikely. Indirect contagion, however, is possible. The dilemma France faces isn’t unique; many European countries are in similar positions. For those with deep fiscal pockets, like Germany, France’s situation is a warning. It illustrates a future where fiscal stimulus isn’t matched by structural reform.
And there’s more. France’s situation will directly impact Europe. Since France and Germany breached the eurozone’s fiscal rules in the early 2000s, France has never truly stabilised its public finances. In fact, over the past twenty years, France has only managed to bring its deficit below the 3% of GDP threshold twice. The European Commission and the ECB will have no choice but to play hardball, increasing pressure on the French government to comply with Europe’s fiscal rules. If they don’t, those rules aren’t just broken—they’re obsolete.
For the ECB, offering a safety net to France via TPI or OMT would send the wrong signal. It’s hard to argue that any widening of spreads is ‘unwarranted’ when it stems from a self-inflicted political mess.