France is barreling toward a perfect storm of political and financial crisis as 2024 comes to a close.

Marine Le Pen’s far-right National Rally is threatening to pull the plug on the fragile coalition government led by Prime Minister Michel Barnier over the conservative grandee's plans to rein in the massive French deficit.

In a dramatic move, Le Pen gave Barnier until Monday to answer her demands and amend his government's budget plans.

Should the government fall, which could happen as soon as next week, it could carry catastrophic ramifications for French finances and the stability of the eurozone.

Confused? That's understandable. There are a lot of moving parts. Read on to understand them all.

How did we get here?

Let’s rewind back to June, when French President Emmanuel Macron called a snap election after the far-right National Rally handed his party a major defeat in the European election. The French vote saw the New Popular Front, a coalition of left-wing parties that came together to block the National Rally, win the most seats in the French parliament but fall short of an absolute majority. Macron's centrists lost their majority and finished second, while the National Rally came in third.

The result was a hung parliament.

The New Popular Front believed that because it won the election, it had the right to form a government. Macron disagreed, arguing that without an absolute majority, a leftist government could easily be toppled by their political adversaries.

Though Macron never said it outright, another reason he blocked the left was to protect his legacy achievements, most notably raising the retirement age to keep France's generous pension program solvent with more baby boomers set to retire.

After weeks of speculation and talks, Macron tapped Michel Barnier, the former Brexit negotiator for the European Union, as premier in early September. Barnier then cobbled together a government with the backing of Macron's centrists and a small band of conservatives, who together hold more seats than the New Popular Front but are still short of an absolute majority.

By tapping a conservative premier who pushed the government further to the right, Macron tied Barnier's future to the whims of Le Pen and the National Rally. The president and premier banked on the fact that the National Rally, which has spent years trying to sell itself as a respectable, mainstream political force, wouldn't immediately take down a rightward-leaning government that was amenable to some of their ideas on immigration and security.

So the National Rally offered Barnier tacit support, while reserving the right to pull the plug on it should he fall afoul of their red lines relating to purchasing power, security and immigration.

Why now?

Barnier made it clear from day one that his priority was to bring down the French budget deficit, the difference between the amount a country spends and the amount it brings in.

France spent massively to keep the economy afloat during and after the pandemic, which caused the deficit to spike to 5.5 percent of gross domestic product in 2023, prompting the European Commission to place France under what its calls an "excessive deficit procedure" — closer scrutiny that can culminate in sanctions if targets aren't met.

The Commission requires eurozone members to limit their deficit to a maximum of 3 percent of GDP to guard financial stability and remain in the good graces of creditors.

With the 2024 deficit projected to come in at 6.1 percent, Barnier and his team quickly got to work to submit a budget aimed at getting France's finances back on track.

The budget Barnier proposed included a staggering €40 billion in cuts and €20 billion in tax hikes for 2025 projected to help bring the deficit down to 5 percent of GDP. While the plans have appeased Brussels, on the whole they're unpopular domestically.

Lawmakers have spent weeks debating the budget, which is technically made up of two bills, one piece of legislation outlining the social security budget and another outlining the government budget.

Both must be adopted by the end of the year, so as the deadline has gotten closer, the issue has come to the fore. After meeting with Barnier on Monday, Le Pen said she and her troops were planning to oust the government "as things stand."

Wait. So how can the government collapse?

Barnier is likely going to have to use a constitutional backdoor to pass his budget, Article 49.3 of the French Constitution. The measure allows the government to enact legislation without a vote in the National Assembly. However, lawmakers are allowed to respond by putting forward a motion of no confidence.

Members of the New Popular Front, still furious over Macron's decision to spurn their chances at governing, have already vowed to do so.

The big question is what Le Pen will do. If the longtime far-right leader and her party back it, the motion would have enough votes to pass, and Barnier's government would be no more.

The decision carries some risks for her though. Since taking the reins of the party from her father more than a decade ago, Le Pen has assiduously worked to clean up its image and portray the National Rally as a responsible force ready to take the reins of government — not burn the house down.

And with no elections in sight, it's unclear how exactly Le Pen intends to capitalize on the move politically — Macron cannot call new elections until the summer, as French law only allows the president to dissolve parliament once every 12 months.

So why is Le Pen willing to bring France to the edge of the fiscal abyss?
Le Pen always said that her tacit support for Barnier’s government shouldn’t be taken for granted, but her threats have become more explicit this week.

Part of this is politics. There's the belief in some circles that Macron, not Le Pen, would shoulder the blame of a government collapse and eventually be forced to resign (to be clear, Macron has given no indication that he's ready to step down).

Then there's Le Pen's rank and file, who see the government as too close to Macron and want to bring it down.

The move would almost certainly be popular with the National Rally's base. An Ipsos poll released on Sunday showed that two-thirds of National Rally supporters were in favor of the motion of no confidence — and 53 percent of respondents on the whole.

Could this just be a negotiating tactic?

... Maybe. Barnier and Le Pen are definitely trying to rally support in public as they continue to negotiate in private.

Le Pen and the National Rally want the Barnier government to accede to their demands on issues relating to purchasing power and immigration. They want Barnier to scrap a proposed electricity tax hike and not to delay the inflation adjustment for pensions. They also want to see cuts to the running costs of the public administration and to medical aid for migrants.

National Rally heavyweight Jean-Philippe Tanguy on Wednesday accused Barnier of "crying wolf" during a press conference, referring to the PM's warnings of an upcoming financial storm. He said the party takes very seriously the consequences of toppling the government and was ready to vote for a stopgap budget measure in lieu of Barnier's austere plans.

In an interview with Le Figaro, published on Thursday, Barnier said he would drop the proposed electricity tax, handing the National Rally a win, and acceded some of the National Rally's other demands. But it remains unclear if that will be enough to satisfy the party.

So when could this all happen?

While he has allowed debate to play out over the budget, everyone knew Barnier was going to have to use Article 49.3 to pass an unpopular budget through a fractured parliament.

There are two opportunities to present a motion of no confidence: after the vote on the social security budget, and after that on the state budget.

The social security budget vote is up first, and at the moment is scheduled for Monday. If Barnier employs 49.3, lawmakers will have 48 hours to bring forward a motion of no confidence. Once the motion is brought forward, it must be voted on within three days.

The National Rally said in a statement on Thursday that it believes the social security budget as constructed remains "unacceptable," and demanded that Barnier scrap three proposals: the delay to the inflation adjustment for pensions, a plan to stop reimbursing patients for certain types of drugs, and a proposal related to corporate tax relief.

What happens if the government falls?

It's not exactly clear. In the immediate term, the budget won't be approved.

Don’t expect a U.S.-style shutdown that would paralyze the country’s administration, though, as the French constitution provides for at least two stopgap solutions. The first allows the government to put forward a so-called “special law” allowing the state to effectively carry over the previous year's budget for a few months.

The second option is more complicated, but would see the parliamentary debate continue until Dec. 21 and then allow the government to adopt the budget via a government order. Barnier would still expose himself to a no-confidence vote, which he'd most likely lose, but the budget would be adopted.

There's also the political uncertainty to worry about. Barnier's government would continue to serve in a caretaker capacity, but Macron would at some point need to name a new prime minister to try to steer legislation through the divided National Assembly.

Why is Brussels so scared?

Barnier seemed like the French savior that Brussels had long sought to put the country back on the path of fiscal discipline when he was named in September.

The European Commission has feared for a while that without drastic action of the sort that Barnier proposed, France's debt and deficit would continue to rise in the coming years in blatant violation of Commission rules.

On the one hand, there's an issue of precedent: If France continued to flout the rules without consequence, that would be an incredibly bad look for the Commission.

But there are also bigger concerns about the stability of the eurozone.

Remember, similar issues in Greece and Portugal prompted Europe-wide scares last decade. Just imagine what could happen if Europe's second-biggest economy found itself in the same mess.

How are the markets reacting?

Not well.

The interest rate on France’s benchmark 10-year government bond came close to rising above its Greek counterpart on Wednesday, while the premium investors are demanding over the comparable German bond was, as of the market opening on Thursday, higher than at any time since the depths of the eurozone sovereign debt crisis in 2012, at 0.87 percentage point.

Commission officials privately note that the market reaction to a government collapse in Paris is more immediate — and dangerous — than any action taken under the European Union’s new spending rules, which in any case would take months to materialize.

OK ... (takes deep breath) ... what’s the worst-case scenario for the eurozone?

A financial storm, with investors selling French government bonds and a dramatic rise in the cost of financing debt.

This would be a first for France, which was largely immune from last decade’s crisis. Unlike then, the European Central Bank is no longer buying bonds of distressed countries to reduce their borrowing costs.

Wait — Le Pen's on trial, right? Does that have anything to do with it?
Not according to her.

For the last two months, French prosecutors have been trying to convince a judge that Le Pen and many other current and former National Rally officials illicitly used money from the European Parliament that was intended to pay for European parliamentary assistants, and instead diverted it toward domestic party work.

The case has dogged her for years in Brussels without impacting her political success back home, but that could be about to change. Prosecutors have presented a seemingly airtight case against Le Pen and her co-defendants — all of whom have professed their innocence — and have asked the judge to hand down fines, prison sentences and temporary bans from running for or holding public office for all the accused, with penalties calibrated to their respective levels of involvement in the alleged scheme.

The harshest punishment was saved for Le Pen: a five-year prison sentence, three years of which would be suspended, a €300,000 fine and a five-year ban on running for public office — including the presidency.

After learning on Wednesday that the judge will a deliver a verdict on Mar. 31, Le Pen told reporters that her party’s line on the budget has nothing to do with the trial. 

The report was published in the Politico.

Victor Goury-Laffont contributed to this report.

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