French government quits just hours after being appointed, deepening political crisis

France's new Prime Minister Sebastien Lecornu and his government resigned just hours after its formation, marking a severe escalation of the country's political crisis and leading to significant market declines, with the CAC 40 dropping over 1.5% and the euro sliding 0.7%. This unprecedented 14-hour government, the shortest-lived in modern French history, underscores deep parliamentary fragmentation and an inability to form stable coalitions, raising concerns among investors about France's fiscal health, given its high debt-to-GDP ratio and deficit. The political instability intensifies calls for President Macron to resign or call snap elections, further destabilizing the eurozone's second-largest economy.

Analysis

PARIS, Oct 6 (Reuters) - France's new Prime Minister Sebastien Lecornu and his government resigned on Monday, hours after Lecornu announced his cabinet line-up, in a major deepening of France's political crisis that drove stocks and the euro sharply lower. The swift, unexpected resignation came after allies and foes alike threatened to topple the new government, with Lecornu saying that meant he could not do his job. The Reuters Daily Briefing newsletter provides all the news you need to start your day. Sign up here. Opposition parties immediately urged President Emmanuel Macron to resign, or call a snap parliamentary election, saying there was no other way out of the crisis. Advertisement · Scroll to continue Lecornu, who was Macron's fifth prime minister in two years, stayed in the job for only 27 days. His government lasted 14 hours, making it the shortest-lived in modern French history at a time when parliament is deeply divided and the euro zone's second-largest economy is struggling to put its finances in order. WHAT'S NEXT? French politics has become increasingly unstable since Macron's re-election in 2022 for want of any party or grouping holding a parliamentary majority. Macron's decision to call a snap parliamentary election last year deepened the crisis by producing an even more fragmented parliament. The centrist president could now call new snap elections, resign or try to appoint yet another prime minister. In past months, Macron, whose mandate runs until May 2027, has repeatedly ruled out the first two options. He is yet to react publicly to Lecornu's resignation. Advertisement · Scroll to continue BFM TV showed footage of Macron walking by the Seine, cutting a lonely figure. OPPOSITION WANTS SNAP ELECTIONS In the opposition, many rushed to ask for Macron to call new snap parliamentary elections or resign. "Macron must now choose: dissolution or resignation, and fast!" the far-right National Rally (RN) said on X. "This joke has gone on long enough, the farce must end," RN leader Marine Le Pen said. Mathilde Panot, of the hard left France Unbowed, said: "Lecornu resigns. 3 Prime Ministers defeated in less than a year. The countdown has begun. Macron must go." David Lisnard, of the conservative Republicans, was also among those who called on Macron to leave. To explain why he could not go forward and strike compromises with rival parties, Lecornu blamed the "egos" of opposition politicians who rigidly stuck to their manifestos, while those inside his minority coalition were focusing on their own presidential ambitions. "You should always prefer your country to your party," he said in a short speech after his resignation. NEW CABINET LINE-UP ANGERED OPPONENTS After weeks of consultations with political parties across the board, Lecornu, a close ally of Macron, had appointed his ministers on Sunday and they had been set to hold their first meeting on Monday afternoon. But the new cabinet line-up had angered opponents and allies alike, who either found it too right-wing or not sufficiently so, raising questions on how long it could last. Lecornu handed his resignation to Macron, who accepted it. FRENCH STOCKS AND EURO FALL Paris' $3 trillion CAC 40 (.FCHI) dropped more than 1.5%, making it the worst-performing index in Europe, as banking shares came under heavy fire. The euro slid 0.7% on the day to $1.1665. Lecornu's two predecessors, Francois Bayrou and Michel Barnier, were brought down by parliament over efforts to rein in France's public spending at a time when ratings agencies and investors are watching closely. France's debt has risen to 113.9% of gross domestic product, while the deficit was nearly double the European Union's 3% limit last year. "It's just one government after another... this is the major problem for French assets, but it has a spillover effect for the rest of Europe," said Chris Beauchamp, chief market analyst at IG Group. DEEP INSTABILITY France has rarely suffered a political crisis so deep since the creation in 1958 of the Fifth Republic, the current system of government. The 1958 constitution was designed to ensure stable governance by creating a powerful and highly centralised president endowed with a strong majority in parliament, and to avoid the instability of the periods immediately before and after World War Two. Instead, Macron - who in his ascent to power in 2017 reshaped the political landscape - has found himself struggling with a fragmented parliament where the centre no longer holds the balance and the far-right and hard-left hold sway. France is not used to building coalitions and finding consensus. Reporting by Elizabeth Pineau, Benoit Van Overstraeten, Michel Rose, Sudip Kar-Gupta, Inti Landauro, Alessandro Parodi; Writing by Ingrid Melander; Editing by Gareth Jones, Sharon Singleton Our Standards: The Thomson Reuters Trust Principles. The resignation of France's new government merely 14 hours after its formation marks a severe escalation of the country's political crisis, signaling a state of near-ungovernability. This event triggered a significant negative market reaction, with the CAC 40 index dropping over 1.5% and the euro sliding 0.7% to $1.1665, reflecting a sharp decline in investor confidence. The political paralysis is particularly alarming given France's precarious fiscal position, with public debt at 113.9% of GDP and a deficit nearly double the EU's 3% limit. The fact that Prime Minister Lecornu's two predecessors were also toppled over attempts at fiscal consolidation suggests that any future government will be severely constrained in its ability to implement necessary economic reforms. The deepening instability in the eurozone's second-largest economy creates a material risk of contagion, with potential spillover effects for the rest of Europe, as the political vacuum and calls for President Macron's resignation introduce profound uncertainty.

Key Decisions for Investors

• Investors should consider reducing exposure to French equities, particularly in the banking sector which is under heavy fire, as the political gridlock creates a highly unpredictable and negative outlook for the domestic economy.
• Closely monitor French sovereign bond spreads for widening, as the government's inability to function raises the risk profile of its debt, especially given the existing high debt-to-GDP ratio and budget deficit.
• Anticipate continued volatility and potential weakness in the euro, and assess exposure to broader European assets for spillover risk from the instability in the eurozone's second-largest economy.
• The primary catalyst to watch is President Macron's response; a decision to call snap elections would introduce significant further uncertainty, while another attempt to appoint a prime minister may only prolong the stalemate.