French Chaos: How Law Firms are Capitalising on Political Turmoil

French Prime Minister Michael Banier handed his resignation to President Emmanuel Macron on Thursday, December 5th, after lawmakers toppled his government. On Wednesday, December 4th, the French National Assembly ousted Barnier’s government through a vote of no confidence. This political turn of events has caused investors in France to become uncertain about the country’s shaky economy and political crisis.

333 of the 577 assembly members voted to sink Barnier’s government after the prime minister attempted to use Article 49.3 of the French constitution to bypass parliament in a bid to push through the unpopular 2025 budget. The budget aimed to lower France’s staggering deficit by cutting government spending and raising corporate taxes. With the 2025 budget dropped, investors, businesses and individuals are concerned about how they will be taxed next year.

Uncertainties After Barnier’s Budget Fails

One key objective of the 2025 budget was to reduce France’s deficit to 5%, which Barnier warned would rise to 7% without effective reforms. The toppled government had planned to raise the tax threshold to follow inflation. With this arrangement reversed, it could mean more taxes for some people and less for others. Those whose salaries were close to the tax limit will end up in a higher bracket, with 18 million households standing to pay higher taxes.

Large corporations, on the other hand, stand to gain by avoiding the tax increases proposed by Barnier’s government. The toppled government had hoped to recover €8 billion in 2025 by targeting 450 companies with revenue of more than $1 billion to close the widening budget deficit.

Pensioners also stand to benefit from the scrapping of the 2025 budget. To save €3 billion, Barnier had planned to halve the pension increase for 2025, which is indexed to inflation. Had the budget sailed, pensioners would have seen their pension increase by just 0.8%. With the budget dropped, they will see their pension index to inflation increase by 1.6%.

The planned budget also aimed to increase military spending by €3.3 billion, which is now unlikely to happen.

A Big Opportunity for Corporate Restructuring Lawyers

According to Frédéric Nouel, Senior Partner at French firm Gides Loyrette Nouel, France has enjoyed seven years of business-friendly policy reforms and tax cuts under Macron’s presidency. During Macron’s first year in office, the country saw the creation of many asset management and financial product management companies. “French financial policy and the Brexit effect enormously benefited reparation of assets,” noted Nouel.

Nouel added that uncertainties over French government law and policies on taxation of businesses and investments will cause clients to hesitate on deals. He also noted that some investments are less susceptible to corporate legal changes, and that investors can invest overseas.

It is clear that with new corporate legal changes on the horizon, short-term adverse effects are inevitable. “Our job is to reassure our clients and keep them informed,” Nouel said.

One of the lead partners in French firm Darrios Villey Maillot Brochier, Bertrand Cardi, said he does not expect Barnier’s government collapse to hurt his law firm’s business. However, Cardi noted the new development will cause deal-making challenges, mainly due to France’s economic and political volatility. According to the lawyer, corporate and investor clients need sound legal advice to combat such challenges, which means opportunities for law firms.

The Unexpected Political Alliance

The majority vote of no confidence that saw Barnier leave office was made possible by an alliance between Jean-Luc Mélenchon’s leftist New Popular Front (NPF) party and Marine Le Pen’s far-right National Rally (NR) party.

Barnier had a minority in parliament, a fact that played a significant role in the collapse of his government. The unexpected alliance came after a standoff over the draft austerity budget. After the budget failed to pass the parliamentary stage, the prime minister opted to use Article 49.3 of the Constitution, allowing the French government to pass legislation without parliament’s approval, which triggered lawmakers to move against him. Since neither party had the 288 votes required to pass a vote of no confidence, the alliance was born to achieve precisely that.

Le Pen and Mélenchon said their target is Macron, whose presidential term ends in 2027. They maintain that he should resign, but Macron has termed that a “political fantasy”.

What Happens to France’s Budget?

In a public address, Macron said that his administration would table a special budget bill by mid-December. The bill will extend the 2024 budget through next year as a stop-gap measure. He also mentioned that an actual budget needs to be adopted by early 2025 to facilitate new required investments.

If the opposition rejects the special emergency bill, the Constitution allows the president to apply emergency powers to bypass parliament and force a budget through. However, such powers are restricted to exceptional circumstances, like when state institutions face an imminent threat, but Macron didn’t allude to such an eventuality in his address.

The collapse of Barnier’s government leaves few options for managing the country’s finances. The caretaker government is now expected to pass a new French government law extending this year’s budget into next year.

What’s Next for Macron?

The president is expected to pick a viable prime minister capable of navigating the polarised and fragmented parliament, which will remain so until July 2025. If he so chooses, Macron can appoint a technocratic government to primarily oversee France’s administration for the next six months.

Another option is to yield to the RN’s budget demands and appoint a prime minister backed by Le Pen’s party. However, this could mean abandoning efforts to cut France’s budget deficits.

The Guardian reported that a source close to Macron said the president had no choice but to appoint a new prime minister. Although it was expected that the president would have named Barnier’s successor during the unveiling for Notre Dame on Saturday, that did not happen, and he is now under pressure to name his appointee.

Source: Law.com International

References:

The Guardian

France 24

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