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Investing.com -- France’s political crisis deepened with the resignation of Prime Minister Sébastien Lecornu after just 27 days in office, a move that Capital Economics said “hammers home how the fractured parliament is making it nearly impossible to pass a budget that reduces the fiscal deficit.”
The brokerage warned that with government borrowing running at more than 5% of GDP and debt continuing to rise, “the risk premium on French government bonds will continue to widen.”
Lecornu’s resignation marks one of the shortest premierships in modern French history, even briefer than former U.K. Prime Minister Liz Truss’s 49 days in 2022.
His newly announced cabinet, which Capital Economics noted was “very similar to the previous one,” had failed to gain parliamentary support. Facing certain defeat on the budget, “he has chosen to jump before he was pushed,” the brokerage said.
What happens next remains uncertain. President Emmanuel Macron could appoint another prime minister and attempt to rebuild a governing coalition.
According to Capital Economics, “he might choose a left -ofcentre candidate who might be more likely to win the Socialists’ backing, but that would risk losing the support of the centre-right Republicans.” The brokerage added that “it is far from obvious that this strategy would be any more successful.”
Another scenario is a snap parliamentary election. Capital Economics said that “the polls suggest that the result would be similar to last year’s vote, which would probably mean continued gridlock.”
It expects the National Rally and its allies to win “around 33% to 34%,” slightly higher than their previous performance.
But the brokerage noted that “the left bloc is now more fragmented” and that coordination among centrist and left-wing parties “is less likely this time, so the National Rally might win more seats even with the same vote share.”
A third option, though unusual, would be an early presidential election. “While this would be highly unusual, it would not be unprecedented,” the brokerage said, recalling that “the last president to resign was Charles de Gaulle in 1969.”
Marine Le Pen remains barred from running, meaning the National Rally’s candidate would be Jordan Bardella. Capital Economics cited polling that puts Bardella on “30% to 35%, followed by Édouard Philippe of Ensemble on 15% to 20%, and the Socialists’ Raphaël Glucksmann on about 15%.”
The political upheaval has already rattled financial markets. Capital Economics said, “government bond spreads in France would rise above those in Italy , and France’s spreads have indeed jumped above Italy’s this morning.”
The brokerage expects spreads to “rise further as the government’s budget deficit is likely to remain wide and the debt ratio will keep rising.”
Despite this, Capital Economics emphasized that “the risk of contagion to other countries is limited because France’s fiscal problems are country -specific and the ECB’s Transmission Protection Instrument provides a backstop to the bond markets.”