December hasn’t been a great month for world leaders. Syrian President Bashar al-Assad has fled to Russia, while South Koreans have so far failed to depose their President, after he attempted to instate martial law. Closer to home, however, it’s French Prime Minister Michel Barnier who’s been in trouble—and whose policies have led to a collapse of the French government.
Barnier remains in temporary charge, while a new leader (and government) is expected in due course. With President Macron insisting that it’s business as usual, what does this political instability say about the current conditions in France, and should businesses in France or looking to move there be worried?
The background
Tension had been building in French politics ever since the general election this past July. President Macron surprised many by triggering a snap election in response to the European Parliament elections, where the far-right National Rally made huge gains in France. National Rally duly won the first round of voting, but the second round resulted in a hung parliament, after a number of left and centrist candidates withdrew to prevent a splitting of the vote.
It took almost two months of negotiations (put on hold for the Olympics) before they led to the appointment of former Brexit negotiator Michel Barnier as Prime Minister. The government he presented was formed of Macron’s own Renaissance party along with a broad array of smaller parties, from centre-right to centre-left. Even with this coalition, the government did not hold a majority in the National Assembly for the first time since 1958.
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This government was always likely to be particularly fragile, and Barnier made the need for hard (and unpopular) choices clear in his first speech, where he hinted at an austerity budget. When it was finally announced, the wheels of a no confidence vote were quickly put in motion, and both the National Rally and three of the largest left-wing parties all voted to remove Barnier as Prime Minister—though his government will remain as caretakers until another one is appointed.
The context
This is all very messy, and not particularly surprising. As with many other far-right parties across Europe, the National Rally have been increasing their proportion of the vote over the past several elections. At the same time, power has ebbed away from traditional factions, and towards new upstart parties. The left-wing New Popular Front alliance ultimately won more seats than either Macron’s centrist alliance or the National Rally.
The particular difficulty in France is that few parties are willing to ally themselves with National Rally, despite their their far-right alliance gaining the third most votes, leaving them as potential kingmakers. To put together a coalition capable of forming a government without National Rally, parties from both the left and the right had to work together, despite them being diametrically opposed on many issues. As you’d expect, this meant protracted negotiations over the roles and policy positions within the first coalition.
This is not exactly a positive for businesses. Organisations of all types dislike disruption and uncertainty, and the current situation does seem uncertain. How the next government is formed is very much an open question, given how long it took to put the first one together, and how quickly it fell apart. But how meaningful is this disruption, really—and might it even offer opportunities for savvy entrepreneurs?
What the French government collapse means
The first thing to note is that a ‘government shutdown’ in France isn’t the same as a government shutdown in the United States. If a budget isn’t passed or a government otherwise collapses in the US, federal services collapse with it. Many federal employees would be furloughed, with only ‘essential’ services remaining in operation. Anywhere else which relies on those federal employees—from national parks, to the Federal Emergency Management Agency (FEMA), to the Federal Aviation Administration or Food and Drug Administration, would be severely impacted, as has happened on several occasions.
While the Barnier government has resigned, it is still in power as a ‘caretaker government’, continuing its duties until such time as another government is appointed. And while the budget that Michel Barnier announced (and which contributed to his downfall) did not come to pass, an emergency mini-budget is due to be presented, meaning that there is little possibility of financial shortfalls. Everything essentially continues as normal—just without any real capacity to create new legislation.
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In some ways, this is actually preferable for businesses. As opposed to a strong majority government—as we’re seeing with the UK’s current Labour government—an inactive or weak coalition government often struggles to pass policies. This can lead to required action being delayed, but it also creates a relatively stable environment for businesses to operate in, at least while those conditions are preserved. And while French bureaucracy is often lamented, it is embedded and resilient enough to weather these kinds of storms.
The unknown in all of this is how long the status quo will be maintained for in France. The likelihood is that, even when a new government is assembled, it will be a similarly weak coalition to the government that has just been deposed. The wildcard is that President Macron can call another snap election one year after the previous one, meaning that there may be another round of elections in the summer of 2025. Whether this actually comes to pass will depend on the evolution of the newer political parties in France, and the strength of the National Rally at that time.
The impact on French businesses
What is true is that big businesses tend to be affected less than small ones by such political shifts. While they may feel it more in the stock market, which can react negatively to political upheaval, they are ultimately operating on scales and budgets which defy any disruption. Changes to things like borrowing costs and business rates will be lobbied against, but the impact is often more on margins than the survival of the business. For smaller businesses, slight shifts in costs can be more substantial.
However, the reality of the current situation in France is that the impact is relatively minimal—or at least, more minimal than people might think. While the CAC 40—France’s equivalent to the Dow Jones or FTSE 100—fell slightly when the news broke, it quickly recovered, and is higher than it was a month ago at the time of writing. The shock of a major bit of political news was quickly replaced with an acknowledgement that the tangible changes are fairly minor.
This is where opportunities might exist for entrepreneurs. The sense is of a country in flux and a negative climate for investment, yet the reality is much more nuanced. As chaotic as French politics seems (and is), much of it is blustering and posturing. The actual governance of France is fairly stable, and even if Macron calls another election next year, the outcome is unlikely to be particularly negative or dramatic for businesses. A National Rally coalition could even be positive in some senses, with the party having pledged to lower taxes and cut red tape.
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It’s also worth looking at neighbouring Germany, and its political situation. A power vacuum emerged after longtime chancellor Angela Merkel stepped down, which the far-right Alternative for Germany (AfD) looked set to fill. Yet after a mini political crisis, the situation appears to have stabilised. While the AfD remains popular, Merkel’s party—the Christian Democratic Union—is back at the top of the polls, and the country’s economy remains stable.
The level of change seen in French politics of late may be offputting, but it’s neither unexpected nor catastrophic. Much may be at stake in other areas of policy, and there is a reason why the majority of political parties in France are battling to keep the National Rally out. As far as businesses are concerned, however, the outlook is relatively calm if you can look past the media storm. For more information on opening a business in France, you can download our free guide below.
