Political instability in France, marked by Prime Minister Michel Barnier’s controversial budget maneuver, raises concerns over financial stability. With a public deficit projected at 6.1% of GDP for 2024 and a recent debt rating downgrade, fears of a potential financial crisis loom. The Prudential Control and Resolution Authority may enforce withdrawal limits to prevent bank collapses, similar to measures in Cyprus and Greece. Despite these challenges, deposit guarantees exist to protect savers’ funds during crises.
Political Turmoil and Its Financial Implications
Is a financial catastrophe looming ahead? On December 2, Prime Minister Michel Barnier made headlines by announcing the invocation of Article 49-3 of the Constitution to push through the Social Security budget (PLFSS). This move triggered the filing of two motions of censure that could potentially topple the government just three months after its inception. The ongoing political instability, which began with the National Assembly’s dissolution on June 9, continues to cast a shadow over France’s capacity to approve the 2025 budget.
The prevailing uncertainties present serious risks to France’s financial stability in the markets. This concern is magnified by the current public deficit, projected at 6.1% of GDP for 2024—twice the threshold established by European treaties. Additionally, France’s debt rating was recently downgraded by Standard and Poor’s, exacerbating the situation. Should France struggle to find buyers for its debt, a panic could ensue among savers, leading to fears of a financial system collapse and potential bank bankruptcies. Such fears could trigger a bank run, with citizens rushing to withdraw their savings.
Potential Measures to Safeguard Financial Stability
While withdrawals from current accounts and life insurance policies can be restricted, what happens if panic sets in? In France, the Prudential Control and Resolution Authority (ACPR) oversees the banking sector and aims to “preserve the stability of the financial system,” as detailed on the Banque de France website. The ACPR holds the authority to enforce measures on banks, including the “limiting or temporarily prohibiting the exercise of certain operations,” such as account withdrawals, as outlined in Article L612-33 of the Monetary and Financial Code.
Although this scenario is unprecedented in France, similar measures have been witnessed elsewhere in Europe. During the sovereign debt crisis, Cyprus implemented daily withdrawal limits in 2013, followed by Greece in 2015. As economist Philippe Crevel points out, “These measures are extremely rare and are always time-limited.” Importantly, such actions do not equate to seizing individuals’ savings; they are precautionary steps intended to prevent the collapse of banks in the event of mass withdrawals.
In France, limitations on withdrawals can also apply to life insurance policies, a provision established by the Sapin 2 law enacted on December 9, 2016. This legislation allows the High Council for Financial Stability (HCSF)—an entity linked to the Banque de France and the ACPR—to implement precautionary measures, including the freezing of life insurance contracts for renewable three-month periods in cases of systemic risk.
In the unfortunate event of a bank bankruptcy, guarantee funds are in place to protect your capital up to specific limits. The freezing of withdrawals from current accounts and life insurance is indeed legally permissible as a means to prevent the collapse of affected institutions. However, it is important to note that even if bankruptcy occurs, savers are insured up to a certain amount. For current accounts, regulated savings accounts (Livret A, LEP, LDDS), and bank savings accounts, the Deposit Guarantee and Resolution Fund (FGDR) can reimburse up to 100,000 euros for each account held at an institution. Meanwhile, life insurance policyholders are covered up to 70,000 euros by the Guarantee Fund for Personal Insurance (FGAP).