FRANCE: Passage Of Special Law Only Delays Inevitable New Year Budget Wrangling
Ahead of the midnight deadline on 23 December, the National Assembly and Senate in quick succession passed a special law to ensure that taxes can continue to be levied, gov't debt can be issued, and public sector workers can be paid in the absence of a state budget for 2026. The special law was passed unanimously in both chambers, with only members of the far-left La France Insoumise (LFI) abstaining. The special law means that no new spending measures are allowed, and vacant positions in the public sector cannot be filled. To use the already-allocated funds from the 2025 budget, parliament must issue a decree to allow gov't departments to disperse this money
- The LFI have warned that the inability of the public sector to hire and the lack of new spending means the special law is intended to deliver austerity via the back door, something the gov't denies.
- Le Monde notes that in early January, an obstacle to swift agreement comes as "members of parliament will resume budget discussions based on the text adopted by the Senate. The 'funnel principle,' which only allows amendments directly related to the provisions of the text, limits the ability of members of parliament to revise the Senate's toughened version."
- PM Sebastien Lecornu will have to walk a fine line between ensuring enough fiscal restraint to get the conservative Les Republicains on board, while ensuring that the budget is not so austere that the centre-left Socialists cannot abstain (the only path for a majority in the National Assembly).
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FRANCE: OATs Unfazed As National Assembly Rejects Revenue Section Of '26 Budget
The 10-year OAT/Bund spread has narrowed ~0.5bps alongside peers today, with no material negative spillover from weekend political developments. The National Assembly overwhelmingly rejected the Revenue section of the 2026 budget, with the initial draft of the bill now moving to the Senate for review. We highlighted throughout last week that there was a clear lack of support for the Revenue bill, which had contributed to modest OAT/Bund widening back to ~76bps (e.g. here)
- In addition to the bad news being priced in through last week, intraday movements have been contained by optimistic signals from policymakers on continued budget negotiations. Finance Minister Lescure noted that “I’m convinced that the majority of parliamentary groups will be able to find the necessary common ground that will allow our country to have a budget”, while a Socialist source told Le Parisien that “The negotiations will continue until the end of the year”.
- This suggests PM Lecornu’s position as PM is stable, at least for now. That said, the outcome of negotiations suggests the PM’s 4.7% 2026 deficit target is unlikely to be met.
- The Social Security section of the budget has been reviewed by the Senate, and needs to be fully approved by December 12. The Revenue section meanwhile must be finalised by December 23. If these deadlines are not met, the government may need to pass a special law to roll over the existing 2025 budget, so that fresh negotiations can continue early next year.
MNI: GERMANY NOV IFO BUSINESS CLIMATE INDEX 88.1
- MNI: GERMANY NOV IFO BUSINESS CLIMATE INDEX 88.1
FOREX: FX OPTION EXPIRY
Of note:
EURUSD 1.55bn at 1.1500/1.1520.
EURUSD 1.38bn at 1.1625 (tue).
AUDUSD 5.59bn at 0.6450/0.6535 (wed).
EURUSD 1.01bn at 1.1525 (wed).
- EURUSD: 1.1500 (773mln), 1.1520 (780mln), 1.1550 (565mln).
- GBPUSD: 1.3150 (269mln).
- USDCAD: 1.4045 (319mln).
