The Latest in French and British Politics

Editors’ note: MarketMinder is nonpartisan, favoring no party nor any politician, and assesses political developments solely for their potential effects on the economy, markets and personal finances.

While all eyes were on the Senate’s marathon session to pass the “One Big Beautiful Bill Act” this week, politics haven’t exactly been quiet across the pond. Namely, French Prime Minister François Bayrou narrowly escaped a no confidence vote while UK Prime Minister Keir Starmer nearly suffered the first defeat of his premiership over a benefit cut package. In our view, this all amounts to a mixed bag for investors: While both scenarios increase political fog today, we see opportunities for bullish falling uncertainty in the future—something investors are familiar with in both countries. Allow us to explain.

France’s Government Survives Another No Confidence Motion

When taking office in January, Bayrou secured the Socialist Party’s support for his minority government by pledging to pursue pension reforms—a long-running sore spot after President Emmanuel Macron’s deeply unpopular 2023 move raising France’s retirement age from 62 to 64. While the Socialists wanted the increase suspended, potential olive branches included carveouts for people nearing retirement now or those in more physically demanding professions. This teed up four months of closed-door negotiations with fellow lawmakers, union leaders and trade representatives aimed at tweaking this rule without sending France’s pension system into the red by the decade’s end.

Talks failed last Monday, as lawmakers couldn’t reach a deal tied to issues around compensating physical laborers and how to finance the tweaks.^[i] When Bayrou declined Socialist leaders’ demand to propose pension reform changes anyway, they raised the no confidence motion with the argument that ditching reforms contravened his promises during the government formation process.^[ii]

A successful motion would have led to France’s second government collapse in less than a year. But the populist National Rally (NR) party—the National Assembly’s largest single party—signaled it would abstain from the vote, effectively saving Bayrou—for now. The measure eventually garnered just 189 votes on Tuesday evening, well short of the threshold needed to oust the government.^[iii]

Yet the NR’s move wasn’t exactly a vote of confidence. While party leadership noted it wouldn’t take down Bayrou’s government over pensions, it has openly signaled support for no-confidence motions over other issues, like energy and immigration. So, to us, this looks like the party seeking to maximize its leverage during upcoming autumn budget talks. Thus, Bayrou’s government remains fragile. Between the upcoming budget and ongoing pension reform efforts, there are further opportunities for government failure ahead.

In our view, this is kind of a dual-edged sword for investors. On the bright side, it extends gridlock, which is generally bullish. The more deadlocked the National Assembly is, the more watered-down legislation tends to be, reducing the risk of new laws creating winners and losers. But the omnipresent risk of government collapse extends political uncertainty in France. Higher uncertainty tends to increase risk aversion, which can weigh on investment and counterbalance gridlock’s tailwinds to a degree. But uncertainty should fall gradually as French politics muddle through and, importantly, markets don’t wait for clarity.

UK Prime Minister Keir Starmer Faces His First Revolt

Given the deep divisions within the Labour Party, it was only a matter of time before Starmer faced opposition from his own benches. And when Chancellor of the Exchequer Rachel Reeves announced welfare reforms in her springtime fiscal policy update, the grumbling was instant, setting up a showdown.

Welfare reform is key to the Starmer government’s agenda—for a couple reasons. For one, when the Office for Budget Responsibility downwardly revised its forecasts, Reeves had to come up with savings in order to meet self-imposed fiscal targets. Having hiked business taxes in last October’s Budget, to considerable societal blowback, she sought to add fiscal headroom by reining in spending this spring, with welfare reform key to making the math work. Secondly, pols from both sides have expressed increasing concern about a perceived rise in voluntary worklessness, which they warn will hamper long-term growth unless folks are incentivized to rejoin the nine-to-five race. (Which would, in turn, increase tax revenue.)

Originally, Starmer backed around £5.5 billion in planned benefit cuts, largely centered on means-testing and work requirements. His so-called “Universal Credit and Personal Independence Payment Bill” tightened the government’s eligibility criteria for personal independence payments (PIPs, the UK’s version of welfare benefits) to current and future applicants. But this proved extremely unpopular within Starmer’s party—by mid-week last week, over 120 Labour members of parliament (MPs) had signed an amendment to block the legislation.

In a bid to salvage their support, Starmer offered to limit disability benefit cuts to only new PIP applicants, leaving existing collectors unaffected.^[iv] This represents a significant softening, with analysts estimating the new bill saves just £2 billion—a whopping -63% reduction—and doesn’t address extant concerns about the UK’s labor force participation. The change was enough for the original 120 rebels to withdraw their amendment, but the general blowback continued.

The bill ultimately passed Tuesday, but at a 355 to 260 margin, with dozens of Labour’s 403 MPs voting against.^[v] The sizable revolt led to some grumbling about a potential leadership change and raised questions about Reeves’s future—which bond markets reacted to briefly after a parliamentary dustup Wednesday.^[vi] Change may not be immediate, but once these whispers start, they often dog the incumbent and defray the government’s political capital as would-be challengers start jockeying for position.

We see a couple investor takeaways here, too. For one, the rebellion shows underappreciated intraparty gridlock within Labour—despite its hefty Commons majority. This time, it resulted in legislation widely seen as economically beneficial getting sanded down, which has weighed on sentiment. But there are other areas, such as the Energy department’s initiatives, where watering down proposals would likely give investors relief.

Secondly (and perhaps more relevant), Tuesday’s trimmed welfare reform sparked another round of handwringing around potential tax hikes in October’s budget. With fewer government dollars saved in the second bill, pundits are already speculating tax hikes to bridge the gap are coming this fall.

To us, this signals souring sentiment toward the UK. Yes, the fiscal uncertainty here is worth noting. But tax hikes aren’t a given, and there seems to be increasing agreement that fiscal policy can’t keep shifting with OBR economic forecasts—a point former Prime Minister Liz Truss made to widespread derision two years ago but which is now gaining mainstream traction. If Reeves were to push to overhaul the budget logistics, making fiscal policy more stable, it could reduce uncertainty and enable businesses to take more risk.

In the meantime, the UK economy remains in better shape than many appreciate, so with tax fears tugging down sentiment, the gap between sentiment and reality remains wide, a fine thing for markets.