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A Vote of No Confidence in the French Prime Minister for the First Time in 62 Years
French Prime Minister Michel Barnier lost a confidence vote initiated by opposition parties after pushing through next year's state budget without parliamentary approval. The budget has become a point of contention in France, as the country faces a significant deficit greater than 3% of GDP, which is the acceptable limit for the EU. While Barnier championed the budget, which aims to reduce this deficit by 60 billion EUR in 2025, it faced opposition from the far-right National Rally party of Marine Le Pen and the left-wing New Popular Front coalition. These events are a continuation of a crisis that began with the announcement of early elections, expected to result in a clear victory for the far-right. In the end, President Emmanuel Macron's party formed a government with the help of socialists, who are now aligning with Le Pen’s party in the confidence vote. Macron is expected to temporarily appoint a new Prime Minister, with the priority of getting the new budget approved by parliament.
The French main index CAC 40 reacted surprisingly positively to the government's collapse and was near monthly highs on Friday, December 6, which can be explained by expectations of less consolidation under a new government, as well as the fact that markets had anticipated the government's collapse. Their reaction to the announcement of early elections in June was the opposite. Positive sentiment was further supported by statements from Marine Le Pen, suggesting that the removal of President Macron is not expected and that the new budget could be approved in a few weeks. Political uncertainty raises the risk premium on French assets, which could affect investors’ willingness to fund government projects. However, market gains are likely to be temporary. Similar to the CAC 40, the European index STOXX 600 reached a monthly high on December 5, recording its sixth consecutive day in positive territory.* The biggest gains came from banks, particularly French banks.
Source: investing.com*
Political Uncertainty Also Grips Germany
A few weeks ago, the government in Germany, Europe’s largest economy, also collapsed. The crisis occurred after German Chancellor Olaf Scholz dismissed the finance minister due to disagreements over how to revive the German economy, which has been in decline for the past two years. With this move, he angered other government party leaders. A vote of confidence in Scholz's government is expected on December 16, which will be a formal step before early elections are announced. The Organisation for Economic Co-operation and Development (OECD) has downgraded Germany's growth forecast for next year by 0.7%, significantly lower than the previous estimate of 1.1%. These uncertain prospects also stem from the potential imposition of higher tariffs by the incoming Trump administration, which could threaten German exports.
DAX Hits Historic High
Despite these challenges, the German index DAX broke through the 20,000-point barrier for the first time in history on December 3. It was bolstered mainly by the retail, transport and logistics, as well as food and beverage companies. Stocks in these sectors rose due to the pre-Christmas shopping rush that started on Black Friday. However, the best-performer in the index was Siemens Energy, which reached record highs, boosted by the company’s positive prospects, particularly from institutional investors.*
Source: investing.com*
Conclusion
From a political and economic perspective, the current events in France and Germany are crucial for Europe’s future development. Uncertainty in both countries, combined with early elections and unclear economic forecasts, could impact not only domestic markets but also broader economic stability. While the positive market reaction to the French government's collapse and the record performance of Germany's DAX suggests temporary stability, long-term investment prospects remain dependent on future decisions by leaders in these countries, which could affect investor confidence across Europe.
David Matulay, analyst of InvestingFox
Warning! This marketing material is not and should not be construed as investment advice. Historical data is not a guarantee of future returns. Investing in foreign currencies may affect returns due to fluctuations. All securities transactions may result in both profits and losses. Forward-looking statements represent assumptions and current expectations that may not be accurate or are based on the current economic environment, which may change. These statements do not guarantee future performance. InvestingFox is a trademark of CAPITAL MARKETS, o.c.p., a.s. regulated by the National Bank of Slovakia.
* Historical data is not a guarantee of future returns.
Sources:
https://www.bbc.com/news/articles/cdxz934p56qo
https://edition.cnn.com/2024/11/07/europe/germany-government-collapse-explainer-intl/index.html
https://apnews.com/article/germany-election-scholz-confidence-vote-69dc9138f438f1f51db222e7ee3428cf
