Conflicting budget plans are causing political unrest across Europe

The French government has once again stood on the brink of collapse, after Prime Minister Michel Barnier refused to bend to demands from parties on the right and the left to make other concessions on the country’s budget plans.

He now faces a vote of no confidence on Wednesday afternoon, which he almost lost.

Meanwhile, the German government is facing a snap election early next year, with its vote of no confidence in the next few weeks.

Even in the UK, Prime Minister Kier Starmer and Chancellor of the Exchequer Rachel Reeves are under pressure just five months into office, with disputes centered on – you guessed it – the budget.

So why have national budgets suddenly become so controversial?

In the eurozone, post-pandemic fiscal rules are putting pressure on the most hawkish EU members.

France, Italy and Greece have long been seen as budget offenders. However, now Germany, Austria and the Netherlands also fall under EU deficit rules that require countries to maintain a deficit ratio of 3% and a debt ratio of 60% compared to their GDP.

The European Commission, the EU’s governing body, now judges the budget not just on its financial plans for next year, but on the impact it has on the long-term trajectory of each country’s deficit.

In Paris, Barnier’s gamble to try to pass 60 billion euros ($63 billion) of tax increases and spending cuts by activating article 49.3 of the French constitution looks set to make him France’s longest-serving prime minister since in 1958.

Political brinkmanship has dragged down French stocks, while pushing borrowing costs to levels not seen since the eurozone debt crisis a decade ago.

Over in Berlin, Chancellor Olaf Scholz made a surprise visit to Kyiv on Monday, promising a €650 million arms deal with Ukrainian President Volodymyr Zelenskyy. The move also raised eyebrows in Germany, as government aid to Ukraine was at the heart of a disagreement within the coalition.

The fall of the government could have long-term consequences for Germany’s financial rules, with opposition leader Friedrich Merz saying he would consider revising the once sacrosanct lending rules.

There is more budget-related damage across the English Channel, where business confidence has fallen to its lowest level since the Covid-19 pandemic, and productivity has fallen sharply since Reeves unveiled his tax hike plans.

It seems that the consequences of the perceived “bad” budget are causing political damage in a way that Europe will need to deal with for the foreseeable future.

Edmund Shing, chief global investment officer at BNP Paribas Wealth Management, stressed that volatility and instability pervade Europe just as the US finds clarity after the election, as President-elect Donald Trump is set to re-enter the White House next month.

“That lack of political certainty at the core, at the heart of Europe, comes at the worst political moment we could possibly be in,” he told CNBC’s “Squawk Box Europe” earlier this week.