France markets tumble as Prime Minister Bayrou faces rebellion over €44 billion budget cuts

French markets got slammed on Tuesday after Prime Minister Francois Bayrou called a sudden confidence vote over his budget plan, and traders across Europe dumped French stocks.

The CAC 40 index fell more than 2% early in the day, then clawed back slightly to close down about 1.6%. According to CNBC, this reaction came as the country’s top three opposition parties said they will not support Bayrou’s vote scheduled for September 8.

Bayrou is trying to push through a new fiscal plan that includes €44 billion ($51 billion) in spending cuts. The move comes after France’s deficit ballooned to 5.8% of GDP in 2024, nearly double the EU’s 3% target.

He wants to freeze welfare, pension spending, and tax brackets at 2025 levels, and he’s also pushing to eliminate two public holidays. The reaction? Outrage across parliament and a potential collapse of his government.

Bayrou’s budget triggers revolt from all sides

Francois Bayrou told reporters on Monday that France is in danger and warned that the country is facing the risk of “over-indebtedness.” He said debt had risen by €2 trillion over two decades and blamed a list of global shocks: the 2008 financial crisis, COVID-19, the Russia-Ukraine war, inflation, and the fallout from U.S. tariffs under President Trump’s second term.

But instead of rallying support, Bayrou triggered a full-on rebellion. Pierre Jouvet, general secretary of the Socialist Party, posted on X that his group would vote against the confidence motion. He claimed the government had no legitimacy in the eyes of the public or parliament and said the Socialists would soon offer their own budget proposal.

The Greens also refused to support Bayrou. So did the far-right National Rally, led by Jordan Bardella, who said, “We will never vote confidence in a government whose choices make the French people suffer.” The hostility from all corners means Bayrou has no realistic path to survive the vote.

France has already been here before. In 2024, Michel Barnier’s government collapsed after it tried to force a 2025 budget without a vote. Since then, political instability has only deepened. The July 2024 elections didn’t deliver a majority to any party or coalition, and the result was gridlock. Bayrou stepped in to try to stabilize things, but this budget gamble is dragging the country deeper into crisis.

Investors brace for fallout as market pressure builds

Markets don’t like uncertainty, and Bayrou just gave them a mountain of it. Reinout de Bock, head of European rates strategy at UBS, told CNBC’s “Europe Early Edition” that the vote announcement was a “surprise”. He warned, “This is not priced at all, and it’s potentially a big story in the next couple of weeks.” Reinout said France’s deficit is the largest in the euro area and doubted they could successfully cut spending.

Meanwhile, the spread between Italian and French 10-year bond yields dropped to 9.8 basis points, the lowest level since 1999. That’s a huge shift from 2022, when the spread was 180 basis points and France looked way safer than Italy. Now, investors are treating both countries as politically risky.

Deutsche Bank analysts wrote Tuesday that if Bayrou loses the vote, President Emmanuel Macron may try appointing a new prime minister. But even that won’t solve anything if the next person can’t get the budget passed. Macron could also call snap elections, but the last ones ended in another fragmented mess, and there’s no guarantee things won’t get worse.

Currently, National Rally is leading in the polls. Still, it’s uncertain whether they can secure a majority as the budget deficit worsens, the economy slows, and their proposed cuts anger nearly everyone.

Bayrou insists that cuts are the only option and says the debate should happen “in parliament, not in street clashes and insults.” But unless he pulls off a miracle in two weeks, his government is finished, and France could be heading toward another election no one seems ready for.

KEY Difference Wire: the secret tool crypto projects use to get guaranteed media coverage