• French Prime Minister Michel Barnier lost a confidence vote on Wednesday.
• The vote was triggered after he forced through part of the 2025 budget using an executive decree.
• It was France's first successful vote of no confidence in more than 60 years.

Michel Barnier, the French prime minister, lost a no-confidence vote in the National Assembly on Wednesday after left and far-right parties voted together.

The collapse of the 3-month-old government makes Barnier France's shortest-serving prime minister and could bring further upheaval to financial markets.

What's going on with France's public finances?

France's government deficit has ballooned in recent years after it spent billions on COVID-19 subsidies, tax cuts, and subsidies for energy bills, which soared following Russia's invasion of Ukraine in early 2022.

The European Union expects France's government deficit to reach 6.2% of GDP this year — more than double the EU limit — before declining to 5.3% in 2025. France is facing an EU review over its deficit, though that's also the case for other member nations, including Italy and Poland.

France is set to spend more on servicing government borrowing this year than on defense.

Late last month, French government-borrowing costs briefly exceeded those of Greece, underlining investors' concern about its economic trajectory. It was a notable moment because Greece was at the center of the eurozone debt crisis less than 15 years ago.

Why was the budget a big problem?

Emmanuel Macron, the French president, appointed Barnier as prime minister in September in hopes of breaking a political deadlock following elections in July that left him without a parliamentary majority.

Macron hoped Barnier, who led the EU's negotiations with Britain after its decision to leave the bloc, could overcome differences with opposition parties and pass the 2025 budget.

It would have raised taxes and cut spending to the tune of about 60 billion euros, about $63 billion, to help restore the public finances.

However, after weeks of negotiations, amendments, and concessions to opposition parties, Barnier used an executive order on Monday to force part of it through without the approval of lawmakers in the lower house.

In response, the far-right National Rally, led by Marine Le Pen, vowed to support a no-confidence motion brought by the left-wing New Popular Front.

On Tuesday, Barnier said he was open to negotiations with all political parties amid a "serious" and "difficult" situation.

However, his pleas fell on deaf ears and the motion was passed by 331 votes — the first time a no-confidence vote has succeeded in France since 1962.

What happens next?

Barnier is expected to resign but may continue as a caretaker until a new prime minister is appointed.

Macron, whose popularity has been on the slide, is under rising political pressure to appoint a replacement. Finding someone to do the job could prove difficult, however, and whoever takes over is likely to encounter the same obstacles as Barnier.

Next year's budget is now unlikely to be passed, although that does not mean there will be a US-style government shutdown in France. Instead, a provisional budget mirroring this year's document is likely to be implemented, economists at ING wrote.

UBS analysts wrote on Thursday: "Since there is little experience with the special laws to roll over a budget into the next year, uncertainty remains at this stage."

Antonio Fatas, a professor of economics at INSEAD, a French business school, told Business Insider ahead of the vote there was no reason for the rest of the European Union to panic as he didn't expect "contagion" to spread.

Fatas said the bloc could do without such a headache, given its anemic economic growth. Germany, the EU's largest economy, is also facing political instability after the collapse of Olaf Scholz's coalition government, with a snap election to be held in late February.

The euro was largely unaffected by the events and was trading at about $1.0517 on Thursday, while the Cac 40 was trading 0.3%.

Market strategists surveyed by Reuters on Wednesday expected the euro to remain weak due to the political turmoil in France and the threat of new US tariffs next year.

Under French law, new elections cannot be held until mid-2025. The political uncertainty France now faces could trigger a spike in borrowing costs and worsen its already-strained public finances.