The French government fell on September 8, facing a 5.8% of GDP budget deficit it can neither fund nor reduce, plunging the Fifth Republic into yet another crisis at a critical time for Europe.

“Europe has a France problem. On top of all its other challenges. And it couldn’t come at a worse moment,” writes Rym Momtaz, editor-in-chief of Carnegie Endowment for International Peace’s Comments newsletter in a note released on September 10.

France is preparing to appoint its fifth prime minister since May 2022, with four different heads of government having served in 2024 alone. Even Michel Barnier, the veteran EU negotiator, lasted only ninety-one days. According to Momtaz, “despite the hyper-presidential system of France’s Fifth Republic, this level of institutional and political instability, coupled with ailing public finances, is now a major liability.”

The malaise extends beyond Paris and comes at the worst possible time as the relations with the US deteriorate rapidly as US President Donald Trump adopts a new economic paradigm based on a transactional multipolar world model.

Trump has withdrawn from the Ukrainian conflict, completely dropping the baby into Europe’s lap that it can't afford to fund at a time when many EU countries are either in recession or approaching a crisis. France is already in crisis and in addition to now needing yet a new government, it may also be forced to ask for an International Monetary Fund (IMF) bailout loan to deal with an imminent Greek-style debt crisis, the Finance Minister Eric Lombard said last week.

“The fallout isn’t limited to France. The domestic political crisis that is now a constant feature of French life weakens the EU at a crucial moment of global reconfiguration,” Momtaz argues, citing US President Donald Trump’s disruption of the transatlantic relationship, Russia’s expansionist ambitions, and upheaval in global trade. “Brussels needs its only nuclear power and member of the United Nations Security Council to be firing on all cylinders.”

The Ukraine conflict is bleeding Europe of its resources, but it is only the tip of the iceberg. Even before the war in Ukraine started, former Italian Prime Minister Mario Draghi warned that Europe has lost its competitive edge and needs to invest a whopping €800bn per year in order to catch up with the likes of China or the US. European Commission President Ursula von der Leyen is due to give her state of the nation speech this week, but so far the modernisation and reform programme has largely become lost in the noise and defence spending needs of the Ukrainian campaign.

France’s political crisis will only make this worse. Macron got off to a good start after becoming president starting off strong with a transformative ambition for Europe, coupled with a much-needed blitzkrieg of structural reforms in France to finally right its finances. But the rot in the system set in quickly with the bodged response to the “Yellow vest” protests in November 2018 and then the COVID shock two years later. The Élysée Palace’s response was to throw money at the problems which laid the foundations for the current budget crisis.

Momtaz contends, “the terms of political discourse in France have been completely divorced from global geopolitical stakes for years.” Instead, the political field is “dominated by narrow-minded, ego-driven personal ambitions” and “no party has tabled a serious program to fix the country’s finances and supercharge its industrial capabilities.”

These problems tally with a similar ossification of the elites in the other countries of Europe. The Daily Telegraph’s economic columnist and bne IntelliNews contributor Liam Halligan recently called the UK government’s finances a “Ponzi scheme” and complained the political elite were incapable of addressing the problems.

“They peddle quick fixes: Brexit promises, unfunded tax cuts, and sovereignty myths. While moderates acknowledge the problems but avoid confronting the crisis's scale, preferring to manage the decline rather than reversing it,” Halligan said.

The French government’s collapse stems from the controversial 2026 budget plan. Bayrou proposed €44bn in savings, but the vote on September 9 shows that consensus is out of reach, regardless of who leads the next government.

According to a new Finance Ministry report, public spending would rise by €51.1bn next year without corrective measures, pushing the deficit to 6.1% of GDP, far above the 4.6% indicated in the plan submitted to the European authorities. Above all, the problem will only worsen in the coming years. Without a change in policy, debt is expected to rise from 113% of GDP in 2024 to 125.3% of GDP in 2029.

“France's fiscal problem is primarily due to its ageing population. Social protection and healthcare expenditure accounted for 32.3% of GDP in 2023, compared with an average of 27.2% in the eurozone, and this expenditure will only increase naturally as the population ages,” ING said in a note on September 10.

France's potential GDP growth remains very low, at around 1.2%, which is not enough to finance the rising cost of social protection. The problem is all the more acute when GDP growth falls below potential, as is the case this year, with growth expected to average 0.6%, says ING.

France’s credit rating is facing a second downgrade in less than a year, and the markets are getting nervous as the absence of a credible reform programme is striking.

“At a time when Europeans need to find a way to overcome their historic taboos to take unprecedented military action in support of Ukraine… the fact that France is unable to agree on budget reform is a major problem,” Momtaz warns.

A corollary to Europe’s mounting economic problems is it has been fuelling the rise of the far-right parties. Macron’s liberal coalition is about to collapse, and the far-right National Rally of Marianne Le Pen is poised to pounce. Far-right parties are now leading the polls in all of France, the UK and Germany. The AfD (Alternative für Deutschland) has overtaken the ruling Christian Democratic Union (CDU) and Brexiteer Nigel Farage’s Reform UK is leading the polls in the UK.

Now, Macron faces dwindling options. “With so many prime ministers being forced to leave within months, they no longer serve the traditional shielding role they always have,” Momtaz notes. The president can either make structural compromises with the centre-left, “even at the cost of some of his landmark projects,” or gamble on proportional representation and new elections — a path “far from sure to produce a clear governing majority.”

“What Macron chooses at this historic turning point will be determinant for his legacy, France, and Europe,” Momtaz concludes. “The far right and far left… feel emboldened and are constantly calling for his resignation and early presidential elections. This would be catastrophic for the EU in the current context.”