Nerves jangle in Europe as France heads into another political crisis
French President Emmanuel Macron welcomed European Commission President Ursula Von der Leyen, who came to the Elysee Palace in Paris for the summit on March 27, 2025.
Ludovic Marin | Afp | Getty Images
Tensions are likely to be high in Brussels this week as a new political outburst in France leaves the country’s much-needed fiscal consolidation in suspense.
The euro zone’s second-largest economy has repeatedly violated European Commission rules on budget deficits and debt limits, and successive prime ministers have been repeatedly dismissed as they tried to solve the problem with proposed reforms, spending cuts and tax increases.
The latest martyr in Paris’ ongoing political impasse is Sébastien Lecornu – France’s fifth Prime Minister in less than two years – who announced his resignation on Monday after just 27 days in office.
His decision to resign came after he failed to get his political rivals (and even centre-right allies) to support his new government. Although budget conflicts between the government and rival parties brought the end of previous administrations, they have not yet announced their 2026 spending or tax plans.
French President Emmanuel Macron signaled on Monday evening that he was desperate to avoid losing another Prime Minister, giving Lecornu 48 hours to prepare a plan for the “stability of the country” and breaking the political impasse.
Lecornu wrote that he would report to the president on Wednesday evening “so that he can draw all the necessary conclusions” about any possible progress on X.
It remains to be seen whether more time will be enough to bring other political parties into the fold, but those on both the far left and the right are calling for Macron’s resignation and new parliamentary and/or presidential elections as they smell blood.
Financial rules were broken
Officials in Brussels are unlikely to want to be seen as interfering in domestic political matters, but there is pressure on Paris to quickly begin serious fiscal consolidation.
France needs to close a budget deficit of 5.8 percent of GDP in 2024 and address a significant debt pile that accounted for 113 percent of GDP last year. This left France behind only Greece and Italy. The European Union’s largest debt pile.
Both levels are well above EU rules, which stipulate that individual members’ deficits should not exceed 3 percent of GDP and public debt should not exceed 60 percent of economic output.
France went underground of the EU “Excessive budget deficit procedure” It applies to member states that do not comply with the rules set out in the Stability and Growth Pact.“
He has until 2029 to get his house in orderBut there is no sign that France will be able to fulfill its obligations any time soon.
CNBC has asked the European Commission for comment on the latest crisis and is awaiting a response.
“The question is: How do you stay true to them? [EU] “The deficit in France right now is clearly beyond the rules, and it’s not clear whether the French budget will bring you into compliance in a short period of time, which is what the rules require,” INSEAD Economics professor Antonio Fatas told CNBC on Tuesday.
“Given the structure of the parliament, the fragmentation, the views of the far right and the far left, it means that it looks very, very difficult to get a budget that complies with these rules,” he told CNBC’s “Europe Early Edition.”
While the EU is ready to finish the job for now, investors may not be willing to ignore France’s lack of fiscal discipline. The country’s rating was already downgraded by Fitch last month, and Moodys is expected to follow suit at the end of October.
Make the necessary correction quickly
If Lecornu’s efforts in the next few hours fail, Macron will face the choice of appointing a new Prime Minister, dissolving parliament and calling new parliamentary elections, or resigning. It is currently unclear which option Macron will choose, but the last option, resignation, seems unlikely.
Economists say that in every scenario, significant progress in reducing the country’s deficit or debt pile is unlikely, and growth is expected to slow down. It is also possible that the 2025 budget will be rolled over to next year.
“Whatever the scenarios, we will not have a proper budget by the end of the year,” Hadrien Camatte, senior economist for France, Belgium and the euro zone at Natixis, said on Tuesday.
“So at this stage we do not see a very positive scenario in terms of fiscal consolidation, which means that the deficit will remain close to the current level of 5.4-5.5% for this year and probably next year, depending on the budget and macro data,” he told CNBC’s “Europe Early Edition.”
Goldman Sachs also said on Tuesday that a possible “budget shift” in France had led the bank to raise its 2025 budget deficit forecast to 5.5% of GDP.
As the remnants of Hurricane Kirk cause heavy rains in Paris on October 9, 2024, visitors shelter from the rain with umbrellas at the Parvis des Droits de l’Homme on the Esplanade du Tocadero, opposite the Eiffel Tower.
Ludovic Marin | Afp | Getty Images
“First, we expect growth to remain below trend… Second, we still expect to see little progress on reducing the government deficit,” Goldman Sachs economists wrote in a note Tuesday. “It also seems likely that France will start next year with a frozen (or at least partial) budget,” he said.
“In any event, deep political disagreements, slower growth and higher borrowing costs are likely to hinder significant progress, and we are raising our 2026 budget deficit forecast by 0.1 percentage point to 5.3% of GDP.” Goldman also cut its 2026 growth forecast for France, forecasting a weak 0.8% growth next year.
