The government has fallen. Long live France!

Moments ago, the Barnier government collapsed, plunging France deeper into its ongoing political crisis. To understand how we got here and where we might be headed, let’s unpack the recent political developments.

A Crisis: A Brief History

The timeline begins with the European elections in June 2024. President Emmanuel Macron's party suffered a significant defeat during the European elections, signaling a major shift in France's political landscape. At that point, Macron likely realized—or feared—that the country was teetering on the edge of ungovernability. The window to consolidate a functional parliamentary coalition seemed narrow but not yet closed.

However, the reality was even starker than Macron anticipated. Public discontent ran even deeper than expected, and the prospect of a far-right government loomed—a scenario that, in an alternate universe, might have been catastrophic, but, truth be told, generated a lot more apathy than I expected. In response, a portion of the French electorate mobilized, particularly on the left, leading to the emergence of the New Popular Front. This unlikely coalition of fragmented interests managed to push the far-right threat further into the distance. The outcome, a deeply divided National Assembly and a government that was effectively on life support, did not solve the problem.

In truth, France was already ungovernable after the European elections. Macron either didn’t fully grasp this reality at the time or chose to ignore it. Now, with the Barnier government’s collapse (a first since 1962), that ungovernability is on full display.

A Major Crisis, Not a Catastrophe

While the political crisis is significant, it’s important to keep perspective. France, unlike Greece in 2010, is not on the brink of financial collapse. Here’s why:

1. Strong Economic Fundamentals. France boasts deep savings reserves, a robust industrial base, and a thriving service sector. Its economy has enough foundational strength to weather political turbulence.
2. Stable Borrowing Conditions. As of this morning, France’s 10-year borrowing rate was just below 3%. Let's see what happens in coming days. But this is far from the borrowing crises that haunted Greece during the Eurozone crisis. Markets have already priced in France’s political risk.
3. Taxation and Eurozone Membership. France has a well-established capacity to raise taxes—an unfortunate certainty for its citizens, perhaps, but a reassuring one for markets. Its deep integration within the Eurozone means there’s no credible risk of an exit akin to Greece’s near-Grexit a decade ago.
4. “Too Big to Fail.” France’s size and economic importance make it indispensable for investors. While political instability is unsettling, there’s no immediate substitute for France in global markets.

For now, the turbulence is mostly political—a struggle to find compromise on budgets and governance—rather than financial. However, this is no reason for complacency.

Liz Truss Redux: The Real Risk?

The real danger lies not in market panic but in policymaking incompetence.

The short-lived premiership of Liz Truss in the UK serves as a stark reminder that markets can swiftly and decisively punish reckless or misguided policies. Granted, France has some protection from the Euro that the UK didn't have. But don't underestimate the power of markets to get innovative if they see a vulnerability.

French policymakers must tread carefully, especially in this volatile environment.

What Comes Next?

At this point, my best guess is that France will turn to one of two types of leaders:

• A technocrat: someone pragmatic, experienced, and largely apolitical—a stabilizing figure brought in to calm markets and restore order.
• A political dinosaur: an elder statesperson whose age and irrelevance dampen public fervor, making them a safer, less polarizing choice.

Either way, this doesn’t spell the apocalyptic collapse that some of Macron’s critics might have hoped for. The ball remains in his court—and in the hands of those advocating for competent, reasonable governance.

France isn’t standing at the edge of a financial cliff. The coming days will be pivotal for Macron and his political opponents. If anyone of them has a reasonable plan, now may be the time. Please consider joining my substack to go further.