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France: Braced for a ‘tough autumn'

French President François Hollande
Dursun Aydemir | Anadolu Agency | Getty Images

With all the sound and fury coming from the debate over the future of Scotland, the tough choices facing France appear to have slipped off the radar. A confidence vote on Prime Minister Manuel Valls' new cabinet, scheduled for Tuesday, equally has the potential to shake up markets, analysts warn.

President Francois Hollande announced the shake-up of his cabinet at the end of August – a upheaval that saw left-leaning Economy Minister Arnaud Montebourg depart. This attempt to regain a handle on power by the embattled President, who is currently under fire following the publication of a headline-grabbing memoir by his former partner which claimed he didn't like poor people, may yet backfire.

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While the government is expected to pass through, there are likely to be a few key abstentions from members of Hollande's Socialist Party (PS), which will emphasize the fragility of the government as it tries to push through economic reforms.

"The vote is likely to display the growing rift inside the PS," Antonio Barroso, senior vice president at Teneo Intelligence, wrote in a research note Monday.

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It could even lead to the dissolution of the government, he warned, as he forecast a "tough autumn" for the country's government.

"It is likely that rogue deputies will continue to defy Valls in the coming months, with the 2015 budget being the first major test that the PM will face in the coming weeks," Barroso wrote.

Hollande's budget is increasingly worrying to investors. The French economy, as measured in gross domestic product, is forecast to grow 0.4 percent on average this year and 1 percent in 2015 by the government. At the same time, inflation is expected to remain low and the government is planning to cut expenditure, but not increase taxes. This will mean that the public deficit to GDP ratio will rise to 4.4 percent this year, according to Barclays economists' calculations, and that France will not hit the 3 percent public deficit to GDP target until 2017 – which could get it in trouble with its European Union partners.

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There is a "risk" that the budget will fall short of complying with European rules, Philippe Gudin, chief European economist at Barclays, warned Monday.

"Such a scenario is likely to be very difficult to sell to European partners and the EC (European Commission), particularly as France has yet to deliver convincingly on the structural reform front," he wrote in a research note.