Due to political fragmentation and popular opposition to fiscal adjustment, subsequent French governments have failed to pursue a credible fiscal adjustment strategy, and the approaching 2027 presidential elections make it unlikely that sufficiently forceful measures will be enacted in the medium term, which will increase the risk of medium- and long-term risk of financial instability. Faced with a continued increase in government debt, which exceeds 100% of GDP, subsequent French governments depending on the support of a fragmented and polarized legislative have failed to implement significant fiscal adjustment. Michel Barnier was ousted as prime minister in December 2024 after trying to push through a social security budget without parliamentary approval. Prime Minister François Bayrou then managed to pass a budget, but only after surviving two no-confidence votes. Due to political opposition, the budget targeted fewer savings and focused on (economically less effective) tax increases rather than spending cuts. Several measures were also of a temporary nature, thus limiting their financial impact.
> The 2024 legislative elections translated into a three-way parliamentary split. The left-wing New Popular Front (NFP) won 182 seats, the centrist Ensemble 168 seats and the far-right National Rally (RN) 143 seats. Under the presidency of Emanuel Macron (2017 - ), France has had six prime ministers. Since the June 2024 legislative election, France has had two prime ministers, namely Michel Barnier (September 2024 – December 2024) and Francois Bayrou (December 2024 – today).
> Government debt stood at 113% of GDP in 2024, compared to a euro area average of 88% of GDP, making France the euro area member with the third-highest debt ratio after Greece (151% of GDP) and Italy (135% of GDP). By comparison, German government debt amounted to 64% of GDP. The fiscal deficit reached 5.8% of GDP in 2024, compared to a euro area average of 3.1% of GDP.
> The Bayrou government was forced to propose a budget with more limited savings, compared to Barinier. The Barnier government sought EUR 60 bn of savings for 2025. The Bayrou government EUR 50 bn, targeting a full-year deficit of 5.4% of GDP, compared to Barnier’ s 5% of GDP target. Relying on constitutional prerogatives pursuant to Article 49.3 of the French constitution, the Bayrou government survived two no-confidence votes after passing the budget without a parliamentary vote.
Against the backdrop of increasing government debt and absent decisive, forward-looking government measures to reduce the fiscal deficit substantially, yields on French government bonds have increased and are not equivalent to Italy’s. Yields on long-term government debt are a function of investors’ perception of the sustainability of government debt and hence concomitant fiscal policy. Current spreads suggest that investor harbor some concerns about the outlook for French debt but continue to give France the benefit of the doubt in terms of a broader, sustainable fiscal adjustment down the line. The political obstacles to a decisive adjustment remain nonetheless significant. In addition to a fragmented political situation, a significant reduction of the fiscal deficit would effectively require expenditure cuts. Taxes are already high and expenditure is set to continue to increase, absent expenditure reform. A significant share of the expenditure-based adjustment would need to come from cuts to social welfare. But this is deeply unpopular, and political parties are not likely to support any significant reform in view of the 2027 presidential election. The short-term outlook for significant fiscal consolidation is therefore dim, which explains why markets price French debt the way they do. But yield spreads at current levels also suggest that investors are not too worried about the government encountering financial distress.
> Ten-year French government bond yields sit around 3.4%. French yields spreads over German bunds are just below 70 basis points, compared to just over 70 basis point for Italian bonds. This suggests that investor deem the probability of a French debt default comparable to an Italian default.
> Total financing requirements for 2025 are EUR 300 billion or less than 10% of GDP. Most of it will be financed by way of medium- and long-term bonds. This means that an increase in long-term interest rates will not immediately translate into a significant increase in interest payments and higher fiscal deficits, somewhat limiting the possibility of a liquidity-fueled debt crisis.
> Government expenditure exceeds 57% of GDP, compared to a euro are average of 50% of GDP. Government revenue account for 51% of GDP, compared to 47% of GDP in the euro area.
> The IMF projects real GDP growth of around 1.2% of GDP annually in 2025-2030. This may turn out to be too optimistic in view of need for fiscal consolidation.
Decisive fiscal action before the 2027 presidential elections that will reduce fiscal deficits to levels consistent with a stabilizing debt-to-GDP ratio over the medium term will remain elusive. Parliament remains split three ways and fiscal priorities among the left and the centrist parties supporting the government do not align, allowing weak prime ministers to resort to constitutional prerogatives to push through only modest fiscal savings. But even these prerogatives are not always sufficient to pass a budget, let alone a budget that generates significant savings, as the fall of the Barnier government demonstrated. Popular opposition to social welfare cuts, including pensions, remains strong, as the yellow vest protests demonstrated. This will limit political and legislative support to pursue an expenditure-based fiscal adjustment in the near term, and particularly so in view of the 2027 presidential elections. It would require a significant increase in market pressure in the guise of significantly higher long-term bond yields, sustained over several months, for the political incentives to push through major budgetary reform. At present, market pressure is modest and the speed with which the debt ratio is projected to increase in the next few years is not fast enough for bond yields to reach “unsustainable” levels, meaning a situation where the government would find it difficult to issue debt.
> The government benefits from significant constitutional prerogatives when it comes to fiscal policy. But disagreement among the parties supporting the government have made it difficult to pass budgets with significant cost savings. If parliament does not approve the government-proposed budget withing 70 days, the government can take advantage of an expedited procedure and invoke Article 49.3 of the Constitution to force the budget through without a legislative vote. However, this then allows parliament to go for a no-confidence vote and topple the government. Article 40 of the Constitution restricts the ability of the legislature to propose amendments that would lead to a reduction in the government's expected income, nor amendments that would increase the government's spending obligations. The government, by contrast, can make adjustments of up to 2% of spending and revenue, once the budget is approved.
> The next French presidential elections will be held 2027. In a field of potential candidate, far-right Jordan Bardella leads the polls with 30% support, way ahead of centrist former PM Eduard Phillipe and left-wing potential candidate (Jean-Luc Mélenchon). Both centrist and leftist parties currently supporting the government will be reluctant to pass approve reform or budgets including significant welfare spending cuts.
> IMF debt-to-GDP forecast. The IMF forecasts a modest decline of the deficit in 5.5% of GDP in 2025 before staying close to 6% of GDP until the end of the decade, barring significant fiscal adjustment. On the current fiscal trajectory, the debt-to-GDP ratio will reach 128% of GDP by 2030, up from 113% of GDP in 2024.
Increasing financial vulnerability and increasing pressure to implement budgetary reform will weigh on France’s international political standing. Budget constrains will limit the amount of military, financial and humanitarian support it will be able to provide to Ukraine. Fiscal profligacy will make French-supported proposal to increase common EU expenditure less credible, particularly in the eyes of low-debt countries like Germany and the Netherlands. Moreover, a sustained increase in investor risk aversion would force the French government to focus on sorting out its financial situation, but this is likely to jeopardize government stability and take several years to accomplish, in the meantime constraining France financial flexibility. Finally, in context of increasing defense expenditure, including commitments made to the United States to raise defense expenditure to 5% of GDP, and reduced fiscal space in event of a renewed exogenous shock, such as global financial crisis or COVID-19, will constrain the government’s fiscal flexibility and increase the pressure to sort out its financial situation.
> France’s sovereign credit rating is AA- (or its equivalent) by international credit rating agencies, Fitch, Moody’s and Standard & Poor’s.
> France has one of the highest social welfare expenditure ratios as a share of GDP in the world. Public expenditure on social welfare exceeds 30% of GDP. Only Austria and Finland spend more on social welfare. Pension spending in France is around 14% of GDP, the third-highest level after Greece and Italy. OECD average is 9% of GDP and the EU average 11% of GDP.
> France has offered relatively limited support to Ukraine (Institute of International Economics). Since 2022, it has provided a relatively low level of military, financial and humanitarian support to Ukraine. France has provided 0.3% of GDP worth of bilateral aid, compared to Denmark’s 2.9% of GDP or Germany’s 0.6%. In dollar terms, France is only the tenth-largest donor and has provided less support than smaller economies, like Sweden, Netherlands, Denmark and Canada.