Rob Murray is the former head of innovation at NATO and the CEO of the Defence, Security, and Resilience (DSR) Bank Development Group. Europe’s long-delayed defense awakening is finally here. With the creation of Security Action for Europe (SAFE) — the EU’s new €150 billion “loans-for-arms” program — Brussels has delivered what was unthinkable just five years ago: a joint bond issue to finance weapons procurement, with meaningful fiscal flexibility for member countries. This is a breakthrough moment. But if SAFE is to deliver lasting security, it needs to be matched by a second financial engine — one that supports not just purchases but also industrial capacity — a dedicated multilateral Defense, Security and Resilience (DSR) Bank. SAFE is rightly being hailed as a historic milestone. For the first time, EU institutions will collectively raise capital on behalf of all 27 member countries in order to finance the joint procurement of high-end defense capabilities — from artillery shells and air defense systems to cyber tools. Contracts must source at least 65 percent of their value within the EU or its close partners, such as Ukraine and Switzerland. The U.K., U.S. and Turkey will be eligible for the remaining share, pending the formalization of security compacts with Brussels. For a bloc that couldn’t agree on a modest €5 billion fund in 2019, this represents a dramatic shift in both mindset and method. There’s a short-term fiscal bonus too. Brussels will allow governments to breach the Stability and Growth Pact by up to 1.5 percent of GDP through 2028 in order to accommodate SAFE-linked spending — a move that will ease pressure on capitals where pandemic-era borrowing and energy-related subsidies have already strained public finances. Yet, for all its scale and symbolism, SAFE is fundamentally a demand-side mechanism: Because the program is structured as sovereign debt, it must close new commitments by 2030 and cannot recycle repayments. Also, its funds flow only to governments rather than directly to firms, which leaves Tier-2 and Tier-3 suppliers — the companies that actually produce the kit — dependent on cautious commercial banks to provide them access to cash. Europe already knows how this ends: In 2023, surging demand for ammunition collided with a frozen credit environment, and triggered critical supply shortfalls. SAFE, for all its strengths, is not an industrial strategy. But a DSR Bank would provide the missing piece. A joint declaration at the June NATO Summit could formally establish the DSR Bank as a coalition of the willing. | Erdem Sahin/EPA Backed with growing political momentum in both Brussels and London, such an institution would follow the model of multilateral development banks — but with an exclusive mandate for defense, security and resilience. It would be funded through paid-in and callable capital from its shareholders (sovereign nations), and would be empowered to issue AAA-rated bonds. These funds would then support direct lending to governments and firms, and offer commercial banks guarantees to underwrite supplier finance, infrastructure investment and export deals. Crucially, these assets could sit on national budgets or remain on the bank’s balance sheet — an important fiscal flexibility as nations seek to expand defense spending without inflating official deficits. Moreover, since multilateral banks typically leverage their capital two- to three-fold, an initial €25 billion capitalization could unlock up to €75 to €100 billion in lending firepower — and that’s just the beginning. With wider participation and scaling over time, the bank could grow substantially, building the kind of patient capital base Europe’s defense sector has lacked for decades. Rather than competing, SAFE and the DSR Bank would operate in tandem, each reinforcing the other to strengthen Europe’s defense-industrial base. SAFE would create pooled demand and mutualized fiscal risk, while the DSR Bank would ensure industrial supply can keep pace — especially in future downturns, when public orders may dip but defense readiness must remain high. In short, one delivers the orders; the other delivers the capacity to fulfill them. And if Europe is to translate this moment of urgency into lasting preparedness, both are essential. To realize this potential, however, policymakers will need to move swiftly. A joint declaration at the June NATO Summit, for example, could formally establish the DSR Bank as a coalition of the willing, with an initial paid-in capital tranche sufficient to begin the bank’s operations in 2026 — just as SAFE disbursements peak. A portion of each SAFE contract could then be earmarked for DSR-backed supplier finance, tying credit directly to procurement cycles, while giving small- and medium-sized enterprises the confidence to scale up. Crucially, the DSR Bank would also extend beyond the EU to include partners such as the U.K., Canada, Japan and Australia — liberal democracies with advanced defense sectors and a shared stake in Europe’s security architecture. SAFE has already proven Europe can act in unison and at speed. A DSR Bank would now prove it can invest together for the long term. Without such an institution, the EU risks fueling inflation and exhausting its fiscal space — just as the strategic contest with autocratic powers deepens. The continent’s defense revival can’t run on one cylinder alone. It’s time to start the second engine.

PARIS ― France’s credit rating was affirmed by Fitch Ratings late Friday, though the rating agency maintained its negative outlook for the country, citing the government’s challenge of bringing down the swollen public deficit. “Political fragmentation complicates France’s ability to implement sustainable fiscal consolidation,” Fitch wrote in a statement as it maintained its rating on France at AA-. The agency also cited “rising international protectionism” and weaker growth in Germany, France’s biggest trading partner, as risk factors. Fitch forecast that French government debt will increase to more than 120 percent of gross domestic product by the end of 2028, higher than the agency’s previous forecast last October. The French government led by Prime Minister François Bayrou is trying to finally rein in the country’s massive public deficit even as France and Europe brace for the economic impact of a transatlantic trade war. After months of political turmoil, last month France belatedly adopted a budget law for 2025. The government aims to reduce the government deficit from 6.2 percent of gross domestic product in 2024 to 5.4 percent this year. That’s still significantly above the 3 percent deficit limit imposed by the EU’s spending rules. The country is under a so-called excessive deficit procedure in Brussels for breaching the budgetary rules in 2023, but the European Commission has already given a first green light to Bayrou’s deficit-reduction efforts. The French finance ministry said “we take note of Fitch’s decision,” adding that “reducing our deficits is a priority.” “The French government is determined to continue implementing the public finance consolidation path initiated by the 2025 Finance Act, and to do so over the long term,” the ministry said in a statement. But Fitch forecast that “deficits will remain sizeable” through 2027, “given the lack of detail on medium-term fiscal consolidation and expected political challenges to getting the 2026 budget approved,” according to its statement. “Political deadlock and polarization have intensified in France following the 2024 snap elections and collapse of the Barnier government over the 2025 budget bill,” Fitch said. “The current center-right coalition led by Prime Minister Bayrou lacks an absolute majority in a highly fragmented National Assembly, complicating economic and fiscal policy making,” it added. The rating agency said new French elections “will likely be called” in the second half of this year. “The outcome and economic policy implications are highly uncertain,” it said. “An increase in defense spending from the current 2.1 percent of GDP will intensify fiscal pressures,” Fitch added. The government’s deficit plans are based on the forecast that the French economy will grow by 0.9 percent this year. But earlier this week, France’s central bank revised downward its 2025 growth estimate to 0.7 percent, raising doubts on whether the French government will manage to deliver on its deficit reduction plan. In its statment Friday, Fitch slashed its growth forecast for France and now sees expansion of just 0.6 percent this year, compared with an earlier prediction of 1.2 percent.  Fitch last October lowered the outlook on France’s rating to “negative” from “stable,” citing the country’s spiraling debt.

In times of urgency, national promotional bank institutions (NPBIs) are the optimal solution to complement the role of the European Investment Bank (EIB) and other alternatives. NPBIs are best suited to set up European or regional financial vehicles with strong control from member states and the best access to capital markets. Europe is on the path to implementing the Polish presidency’s slogan, ‘Security, Europe!’ Recent geopolitical shifts have not disrupted the prevailing trends in European capital markets or shaken confidence in our own capabilities. The president of the European Commission announced the creation of a new defense financial instrument with an allocation of €150 billion in the form of loans for member states. The Commission is proposing amendments to the Stability and Growth Pact, allowing military expenditure to be excluded from the excessive deficit clause and enabling transfers within existing EU financial programs — e.g. cohesion policy. EIB is also exploring ways to further increase its support for so-called dual-use expenditure. External pressure for swift economies of scale in financing European defense spending strengthens the argument for utilizing financial institutions trusted by governments that are capable of both the EU’s and national defense initiatives. In Poland, Bank Gospodarstwa Krajowego (BGK) has been implementing EU financial instruments since the country joined the EU. With its experience in financing the ever-growing number of EU policies, BGK has reinforced its flexibility and efficiency alongside the ability to swiftly adapt to new challenges. The agility of BGK and NPBI to absorb ‘special assignments’ — even on short notice — derives from the status of a public financial institution and a long-term investment horizon. Poland’s defense financing model BGK has notable experience in securing funds for defense expenditure. Poland leads NATO in defense spending relative to GDP, with projections for 2025 indicating that this share will stand at 4.7 percent of GDP — higher than the United States, at 3.4 percent, and the United Kingdom’s planned increase to 2.5 percent by 2027. In nominal terms, Poland ranks fourth in Europe, following Germany, the United Kingdom and France. Poland’s efforts are financed through the state budget and the Armed Forces Support Fund (AFSF). This fund, established under the relevant act, is managed by BGK and is de facto anchored in the state budget. In 2025, 66 percent of defense expenditure is expected to come from the state budget, with 34 percent allocated from the AFSF. BGK is responsible for managing the fund’s financial liquidity, securing debt financing — primarily via loans and borrowings, supplemented by bond issuance — and distributing funds. To date, BGK has secured approximately €40 billion for AFSF from international markets, benefiting from guarantees from the Polish State Treasury and export credit agencies, resulting in favorable financial conditions. BGK’s track record as a borrower demonstrates that concerns about the impact of military spending on ESG ratings are not an obstacle to obtaining financing. This is particularly relevant in light of ongoing EU negotiations for the Capital Markets Union, a matter yet to be settled. Toward a European defense financing architecture EU institutions already have a variety of advanced financing tools at their disposal. The EIB’s role in financing dual-use projects, including support for small and medium-sized enterprises in the defense sector, will be crucial for various activities, including financing new technologies, or so-called defense tech. BGK’s experience in managing the AFSF could be leveraged to finance strictly military expenditure, which the EIB is currently unable to support. This could serve as a foundation for creating a European Defense Fund, which could be set up and co-managed with other banks. Creating a new fund through NPBIs offers several advantages. NPBIs possess in-depth knowledge of regional industrial ecosystems, enabling more tailored funding solutions for local companies and research institutions. They also facilitate faster and more efficient allocation of funds. Leveraging their experience with EU funding programs, such as InvestEU, NPBIs are well positioned to implement defense projects efficiently. NPBIs can combine EU, national and private funds, creating significant financial leverage, and integrating various instruments like defense bonds, preferential loans or investment guarantees. Their regional perspective also makes them adept at identifying and supporting strategic companies in the defense supply chain, including research and development initiatives. Creation of armaments fund(s) Given the urgency of addressing the armaments gap, we propose that the first step toward implementing the ReArm Europe Plan should involve creating regional or task-based armaments funds , such as one dedicated to the eastern flank of NATO. Such a vehicle could quickly meet the funding needs of countries looking to accelerate defense procurement spending and increase financing for their manufacturing capacity. A regional defense fund would provide new funding opportunities to member states where military modernization efforts are constrained by limited access to financing. Projects agreed upon at the EU, NATO and member states levels could be financed by a fund, similar to the structure of Poland’s AFSF. The selected NPBI would manage the fund, securing financing with a guarantee from the European Commission and, in some cases, member states too. Such a fund could be anchored in the EU budget, mirroring the setup of the AFSF within the Polish budget, with the Commission providing grants or other resources, including the issuance of defense bonds if necessary. In terms of financing the expansion of production capacities, the private sector could play a key role, with appropriate incentives such as financing guarantees. In conclusion, we believe that the European discussion on financing its defense capabilities has now shifted from ‘whether’ to ‘how?’ And NPBIs are the answer, emphasizing the crucial role in managing and raising funds for European financial programs. The advantage of NPBIs, such as BGK, is their ability to quickly absorb new tasks. To us, the EU defense policy represents another assignment, and leveraging such trusted partners offers the fastest route to building an effective and open financing architecture. This approach complements the role of other financial institutions, EIB or potentially a new armament bank modeled on the European Bank for Reconstruction and Development. Modifying a public bank’s mandate is a much simpler process, and given the time-sensitive nature of the current defense investments, regional procurement funds managed by NPBIs offer the most efficient solution.

BRUSSELS — European Commission President Ursula von der Leyen privately suggested triggering an emergency clause to allow countries to increase defense spending, four European Union officials told POLITICO. The idea, made during a closed-door meeting with national leaders on Monday, would allow governments to increase their defense spending substantially without violating the EU’s budget rules. Those rules allow countries to deviate from their spending plans “in the event of a severe economic downturn” or in “exceptional circumstances outside the control of government.” Von der Leyen told reporters she would “use the full range that we have of flexibilities in the Stability and Growth Pact to allow for a significant increase in defense spending.” She added: “For extraordinary times, it is possible to have extraordinary measures also in the Stability and Growth Pact. And I think we live in extraordinary times.” During the earlier meeting, she had also floated specifically exempting defense spending from national budget deficits but did not go into further detail, one of the four officials said. Von der Leyen is under pressure from highly indebted southern European countries, such as Italy and Greece, to treat defense spending differently. Officials said triggering the emergency clause would allow countries to spend more on defense without reopening a deal on national spending that came into force last year after long and arduous haggling. “If a faster increase [in spending] is due to defense, they might say these are exceptional times,” said Zsolt Darvas, a senior fellow at the Bruegel think tank in Brussels. “So I mean, now we have a threat from Russia” and the United States security guarantee for Europe appears to have weakened, he added. The revived spending rules were criticized in many ways, not least for straightjacketing countries in the case of unexpected events such as war, which require immediate fiscal responses. The invasion of Ukraine had not only triggered an abrupt reassessment of EU member countries’ defense preparedness, but had also required heavy government subsidies to keep a lid on energy prices. DEFENSE OF THE REALMS Under the rules, which are an attempt to enforce collective fiscal discipline, each country is required to precommit to four- or seven-year plans to get their deficits and debt levels within agreed limits. The pandemic and the Ukraine war left many EU countries with excessive budget deficits, and the need for such adjustment plans. But those plans are now under fresh pressure from U.S. President Donald Trump’s demand for a sharp and immediate rise in defense spending above and beyond the reference level for NATO members, which is 2 percent of gross domestic product. The current rules offer a number of small concessions for countries that want to scale up their military budgets. Countries that commit to stronger defense capabilities are allowed “a more gradual fiscal adjustment,” according to a Commission spokesperson. Moreover, increases in defense spending can be considered a mitigating factor for countries whose expenditure levels would normally trigger the Commission’s sanctions procedure. In a further concession, national capitals are discussing broadening the definition of what constitutes defense spending, as critics such as Poland argue that the current framework is too conservative.

PARIS — French Prime Minister François Bayrou is planning to put his job on the line four times this week as he attempts to enact a long-overdue budget for 2025. The audacious gambit began Monday, when Bayrou pushed through part of the budget using a constitutional maneuver that allows the government to pass legislation without a vote, but that in turn allows opposition lawmakers to put forward no-confidence motions. Bayrou triggered the measure, Article 49.3 of the constitution, twice on Monday. The prime minister will employ the same maneuver twice more in the next week to pass all the remaining parts of the budget, according to a lawmaker from Bayrou’s camp. Opposition lawmakers will then have four separate opportunities to topple the government for a second time in less than two months, after having brought down former Prime Minister Michel Barnier in December over his spending plans. Votes on the first two no-confidence motions are expected Wednesday. Like Barnier, the centrist Bayrou is attempting to pass a slimmed-down budget aimed at cutting France’s massive deficit, although the current premier’s plans are less aggressive than those of his conservative predecessor. But while Barnier had targeted the far-right National Rally as a potential partner for his minority government, Bayrou has been courting the center-left Socialist Party. Though the party has voiced its displeasure with the budget, it said in a statement on X that it would not vote for the no-confidence motion linked to Bayrou’s spending plans because “France needs a budget.” However, the Socialists said they plan to put forward their own proposal to censure the government over what they believe is Bayrou’s refusal to uphold “republican values” — a shot at the prime minister over controversial comments he made on immigration last week. That measure could still topple the government if enough lawmakers support it, but that depends on what the National Rally decides to do. The party has not yet announced its plans. Though Le Pen and her troops are unlikely to vote for a no-confidence motion that criticizes Bayrou’s tough language on immigration, it’s not out of the question. The National Rally ended up voting for a measure criticizing the party as a means to take down Barnier’s government in December. Should the National Rally vote for the separate motion of no confidence linked to the budget, Bayrou would need the entire Socialist Party to fall in line to keep his job — which is not a given. Last month, when Bayrou faced his first no-confidence motion, eight Socialist MPs broke ranks and voted to bring him down. Anthony Lattier, Sarah Paillou and Victor Goury-Laffont contributed to this report.

PARIS — France’s 2025 budget cleared a key parliamentary hurdle on Friday, setting up a make-or-break moment next week in which Prime Minister François Bayrou will likely be forced to put his job on the line. The joint committee comprised of lawmakers from the Senate and National Assembly tasked with hammering out a compromise reached a final agreement on Friday, meaning spending plans will now advance to a vote in both chambers of the French legislature next week. Lawmakers didn’t radically change Bayrou’s spending plans, a mix of €53 billion in spending cuts and tax hikes aimed at reining in France’s eye-watering deficit, which reached 6.2 percent of gross domestic product in 2024 — more than twice the level permitted by EU rules. Instead they made several small tweaks to the law, such as freezing spending on medical assistance to foreigners instead of topping it up to keep up with inflation. Bayrou’s minority government does not have enough support to pass the budget next week, so it will likely need to use a constitutional back door that allows the government to adopt legislation without a vote but, in return, exposes it to a no-confidence vote. Former Prime Minister Michel Barnier in December attempted to use that measure to pass his spending plans, but lawmakers ousted him, leaving France without a proper budget entering the new year. Whereas Barnier tried to work with the far right, Bayrou is hoping the Socialists can be a potential opposition partner to help him pass his less ambitious spending plans. However, the two sides have so far been unable to strike an agreement, and controversial comments the centrist prime minister made this week on immigration have jeopardized the potential partnership. The Socialist senators and MPs who sat on the joint committee voted against the bill, meaning all eyes will be on them when Monday’s chamber vote arrives. While Bayrou does not need the party to vote for the bill, he will likely need its lawmakers to abstain from voting for a no-confidence measure to survive. “That is not our budget. We are in the opposition,” said the Socialists’ leader in the National Assembly, Boris Vallaud. But in a sign that potentially bodes well for Bayrou, Socialist party leaders acknowledged that they were able to obtain several concessions to preserve social spending. “Would we have wanted more? Of course, of course we would have wanted more. But those who gamble on having less or having everything always take the risk of having less,” Vallaud said.

PARIS — The French government is planning to cut public spending in 2025 by €32 billion and to increase taxes by €21 billion, Budget Minister Amélie de Montchalin said on Wednesday. “It’s the biggest spending reduction effort in the last 25 years,” she said in an interview with French broadcaster TF1. De Montchalin said the government was planning to cut the budget of all public agencies by 5 percent and to merge some of them to reduce costs. POLITICO first reported on Tuesday that the government was eyeing a total budget effort of €53 billion in 2025. France went into the new year without a proper budget after former Prime Minister Michel Barnier’s government was toppled over its spending plans, but lawmakers adopted some stopgap measures to avoid a U.S.-style shutdown. On Tuesday, Prime Minister François Bayrou said he planned to bring the country’s deficit down to 5.4 percent of gross domestic product in 2025. France’s deficit came in at 6.2 percent of GDP last year, more than twice the level permitted by European Commission rules. Brussels placed Paris under an excessive deficit procedure for overspending in 2023. Bayrou is planning to to bring the deficit in line with the 3 percent rule required by the Commission by 2029.

Is a career banker the right man to solve France’s disastrous public finances? Apparently so. On Monday, the new French government formed by Prime Minister François Bayrou appointed finance veteran Eric Lombard to the difficult role of economy and finance minister. Lombard comes to the role from Caisse des dépôts et consignations, the investment arm of the French state, where he was director general. Lombard will now be charged with the politically arduous task of delivering France’s long-overdue budget for 2025 and cutting the country’s massive deficit, while simultaneously keeping financial markets and the European Commission appeased that France’s economic fundamentals won’t be derailed in the process. “I am aware of the difficulty of the task,” he said during a handover ceremony at the economy ministry on Monday night as he pledged “to reduce the deficit without killing growth.” Unlike many of his predecessors, the new minister is not a career politician, which means he enters the role with the possible advantage of having little political baggage and few entrenched affiliations that often hinder reform efforts. Within France’s economic circles, meanwhile, Lombard has already cultivated a reputation as a skilled and pragmatic operator who has long had an eye on politics. “He’s been very, very keen to get into politics for a very, very long time,” said a French official who knows him well and was granted anonymity to speak freely. LOMBARD BY NAME, LOMBARD BY NATURE Before joining Caisse des dépôts, Lombard was the head of the French division of Italian insurance giant Generali, until the group’s CEO, Philippe Donnet, replaced him with Jean-Laurent Granier. Before that, Lombard worked for nearly 20 years at BNP Paribas in various high-level positions including as president of the bank’s insurance arm. But it’s his most recent stint at France’s public investment arm that is likely to have prepared him most for the job given the French government’s inclination to intervene directly in the economy, especially in strategic sectors. During his time at the “Caisse,” Lombard will have experienced what it is like to work under public scrutiny thanks to the institution’s role in allocating public investments. Working in his favor is the fact the institution registered €3.9 billion in profits last year, of which €2.5 billion will have been returned to France’s state coffers. “He has a strong political sense and strong convictions, backed up by great financial and managerial skills,” said French businessman Bernard Spitz, who co-founded the social-liberal think tank “les Gracques” with Lombard. “He will be able to judge independently, and will have the trust of the markets, in France and abroad: this is a major advantage in the country’s current financial situation,” he told POLITICO. Those who know him add Lombard is a lover of music who, despite coming from a rich family of industrialists and modern art collectors, leans left politically. Indeed, despite spending most of his career in the private sector, Lombard’s brush with public service comes as an adviser to former socialist Finance Minister Michel Sapin. Thanks to the role, however, Lombard will have gained experience of French administration and in particular the French Economy Ministry, known in France as “Bercy.” French President Emmanuel Macron appointed Bayrou as French prime minister this month, after the National Rally and the New Popular Front coalition joined forces to topple Michel Barnier’s government. As a result, Barnier’s budget for 2025 was also rejected, leaving France without the relevant law just a few days before an end-of-year deadline. Bayrou now hopes that France will pass a new budget by mid-February. In the meantime, the outgoing government has passed a stopgap budget, which effectively carries over the 2024 budget to 2025 to prevent a U.S.-style shutdown in January. But the stopgap does nothing to reduce France’s deficit, which reached 6.2 percent of the country’s GDP this year, twice the level permitted by EU rules. France is already under an excessive deficit procedure in Brussels for breaching limits in 2023. So far, there are no indications that Bayrou’s government can succeed where Barnier has failed. Bayrou can only count on the same fragile parliamentary coalition built by Barnier — which includes Macron’s centrists and the right-wing Republicans — as he has failed to get the support of France’s socialists. Some in Macron’s camp, nonetheless, hope that Lombard’s appointment could help to build bridges with the left. An adviser from Macron’s camp went as far as saying that Lombard’s economic doctrine “is pure social-democracy.” Other indicators Lombard skews left, beyond his role with socialist Sapin, is the fact he described himself as “left wing” in a book he wrote two years ago, according to Le Monde. In his handover speech on Monday Lombard promised to “work on a better distribution of income” and called for more “social justice.” Lombard will be positioned with junior Minister Amélie de Montchalin, from Macron’s camp, who will have specific responsibility over the budget. 

PARIS — The outgoing French government has readied a stopgap budget to ensure the country is not paralyzed come January. “It is ready,” budget minister Laurent Saint-Martin told broadcaster TF1 on Monday morning. Saint-Martin said the special law, which would allow the government to effectively carry over the 2024 budget into 2025, could be presented at the government’s next cabinet meeting. Part of a 2025 budget was rejected last week as the left-wing New Popular Front alliance and Marine Le Pen’s far-right National Rally joined forces to topple Prime Minister Michel Barnier’s government. French President Emmanuel Macron promised to quickly name a replacement, and could do so as early as Wednesday, according to a presidential adviser who spoke to POLITICO on the condition of anonymity as he was not authorized to be named. Several names have circulated in French media in recent days, including centrist Macron ally François Bayrou, Armed Forces Minister Sébastien Lecornu and conservative Minister of Partnership with Territories and Decentralization Catherine Vautrin. Macron on Monday is scheduled to meet with the heads of a few political parties, including the greens and communists. The National Rally, which has not met with the president at the Elysée since the government fell, has already said it would support a stopgap measure, which will buy Macron and the new French government some time to sort out France’s finances. However, senior officials have warned that rolling over last year’s budget would have its own problems. Barnier said it would mean higher taxes for 18 million households, and it would do nothing to cut a deficit projected to reach 6.1 percent of the country’s gross domestic product this year, twice the European Union limit. Barnier’s government, however, was unable to get lawmakers to sign off on their proposal to get that figure down to 5 percent for 2025 with €60 billion in combined tax hikes and spending cuts Despite the political instability, financial markets have not panicked, as they’ve factored in political risk and consider the French economy as solid, despite the massive debt level. Anthony Lattier contributed to this report.

PARIS — France doesn’t have a government or a budget for next year —  but you wouldn’t know it from the eerily quiet reaction from financial markets. Some politicians, including Michel Barnier himself, who was toppled as French prime minister after losing a vote of no confidence on Wednesday, warned his firing would send markets into a tailspin as investors fretted about paralysis in the eurozone’s second biggest economy, potentially destabilizing the entire bloc. But France’s benchmark stock market index, the CAC 40, actually rose, and one of the best barometers of political risk, the difference between French 10-year bond yields and those of Germany, also showed no sign of alarm. “There was no market movement because there was no element of surprise,” said Léo Barincou, senior French economist at Oxford Economics. The absence of drama was just as clear in Brussels, where even the European Commission on Thursday downplayed the gravity of the situation, stressing that France’s financial basics are in good shape despite its massive debt. Experts believe that the main reason for this deafening silence, besides the anticipation factor, is that this is still a debt crisis unfolding in slow motion. France may be navigating uncharted waters, but they’ve decided not to worry, at least for now.  “This crisis is going to continue for quite some time,” said S&P Global Market Intelligence Vice President Ken Wattret. “So far, the financial markets’ response to it  has been relatively benign,” he said, warning that the reaction could worsen “the longer it continues.” THE EUROZONE’S BAD STUDENT France is facing a so-called excessive deficit procedure in Brussels for overspending last year. Paris forecasts its deficit — the difference between how much it spends and how much it brings in every year — will hit 6.2 percent of gross domestic product this year, twice as much as the European Union limit. More worryingly, the gap is widening even as the strains on the public purse from the pandemic and the invasion of Ukraine recede across most of the continent. Most worryingly of all, however, this has not come out of the blue. France’s deficit has been below 3 percent of GDP in only three of the last 22 years, as successive governments have put off structural reforms. Barnier’s budget plans, which included €40 billion of spending cuts and €20 billion of tax hikes, had reassured the Commission that, this time, Paris was serious. In a show of good faith, the Commission had accepted a preliminary plan outlining a steady decline in the deficit over the next few years and had declined to elaborate on what would happen if Barnier’s budget proposals were rejected. That extended a long tradition in Brussels, where the first rule of French budget deficits is that you don’t talk about French budget deficits. Both in 2003 and again in 2014, France had flouted existing deficit rules and avoided sanctions — “parce que c’est la France,” as then-Commission President Jean-Claude Juncker once put it.  The Commission launched an excessive deficit procedure against France earlier this year, albeit in a new framework where the risk of sanctions is all but eliminated. But there still seems to be an omertà in force. At her appearance before the European Parliament’s Economic and Monetary Affairs Committee on Thursday, European Central Bank President Christine Lagarde shut down any attempt to raise the issue of what might happen in case the bond markets truly took fright. France had flouted existing deficit rules and avoided sanctions — “parce que c’est la France,” as then-Commission President Jean-Claude Juncker once put it. | Pool Photo by Kenzo Tribouillard via Getty Images “I will not talk about individual countries,” she said in response to a question which referenced France, before giving a hearty “yes” to the next question, when asked specifically whether Germany should raise its level of public investment. The topic is also likely to come up at a meeting of EU finance ministers in Brussels next week even if, of course, it is not on the official agenda.  “There is no pressure, no intention, to convey any particular messages to France,” said a senior EU official ahead of the meeting. “What France is going through is a parliamentary constitutional process. It is a politically complicated situation, but you just have to respect the democratic processes.” The same official said the new French government might have to send the Commission a new deficit-reduction trajectory for the coming years.  WHAT HAPPENS TO BARNIER’S BUDGET? There are other, better reasons not to make more of a drama over what is happening. France may now miss a year-end deadline for adopting its general budget and social security law for next year, but there is no real risk of a United States-style government shutdown: Experts agree that Barnier (as caretaker prime minister) or his successor could still adopt a so-called special law, which would allow the state to effectively carry over the previous year’s budget until a new one is adopted.  Marine Le Pen, who contributed to bringing down Barnier joining forces with the left, said her National Rally party would vote to approve that special law. Copy-pasting last year’s budget means that, contrary to what it promised, France won’t be cutting its deficit. Budget Minister Laurent Saint-Martin has argued it could widen further to 7 percent of GDP.   However, if not getting better, the situation might at least not get much worse. The French economy is still set to grow next year, providing a bigger taxable base. Many spending elements would rise in line with inflation, but so would some tax receipts. Moreover, the ECB is expected to keep cutting its interest rates next year, which should keep a lid on its debt servicing costs. And unlike Greece and Portugal 14 years ago, France doesn’t have a yawning current account deficit. It is not dependent on the “kindness of strangers” to fund its government. But while Barnier’s budget plans were music to the Commission’s ears, things might be more difficult with a possible new budget or a copy-paste of last year’s. For Guntram Wolff, an economist at Bruegel, the mess will test how serious Brussels is when it comes to enforcing its revamped spending rules. “The Commission, at the end of the day, has to follow the rules, and has to follow the rules in an impartial way, really also when it comes to France,” he said.