France skirts another crisis and markets like it — but reform suffers
French Prime Minister Sebastien Lecornu speaks during his general policy statement to the French National Assembly, the lower house of France’s parliament, on October 14, 2025 in Paris, France.
Mathilde Kaczkowski | Afp | Getty Images
French Prime Minister Sebastien Lecornu’s decision to suspend his controversial pension reform provided some relief to markets on Wednesday; This move looks set to prevent another government collapse, at least for now.
But canceling the 2023 reform, a key part of President Emmanuel Macron’s legacy that would raise the retirement age from 62 to 64 and save a beleaguered government, comes at a price.
“There will be no increase in the retirement age from now until January 2028,” Lecornu told lawmakers in the National Assembly on Tuesday as he presented his government’s policy roadmap.
Lecornu proposed the concession to win the support of the Socialist Party ahead of a no-confidence vote against the government on Thursday, while also promising not to force the budget through parliament.
The center-right Les Republicains party also said that it would not support the proposals tabled by the far-left and far-right blocs.
With Lecornu’s government now looking likely to survive, this has revived hopes of passing a 2026 cost-cutting budget aimed at tackling France’s deficit and debt pile.
Investors reacted positively to the prospect of France’s fifth Prime Minister avoiding being ousted in less than two years; France’s CAC 40 rose 2.5%, its biggest daily gain since April. euro It increased by 0.2 percent against the dollar.
Cost of concessions
The proposed cancellation of pension reform will not be cheap, and it also means France is backtracking on much-needed and overdue structural reform.
France’s retirement age of 62 and its proposed increase to 64 (and the requirement that the retiree must have worked for at least 43 years) is much lower than the standard age in many other European countries; The retirement age is planned to rise from 66 to 67 in the UK in 2026; for example, 65 in Germany and 67 in Italy.
But resistance to changes in age and contribution requirements runs deep in France and Macron He resorted to using special constitutional powers to pass his pension reform plan to the lower house of the National Assembly in 2023, angering lawmakers and leading to widespread protests and strikes.
Now, his signature reform has been withdrawn and analysts say it could be further diluted, affecting France’s fiscal outlook.
The suspension of the unpopular pension reform is expected to cost 400 million euros ($465 million) in 2026 and 1.8 billion euros in 2027. Lecornu said such costs “must be covered by savings” and “this cannot be done at the expense of a growing budget deficit”.
Eiffel Tower, Paris, France.
Alexi Rosenfeld | Getty Images News | Getty Images
Goldman Sachs economists said suspending pension reform until the 2027 presidential election would have only a limited impact on the near-term fiscal outlook. If the suspension continues beyond that, debt and deficit reduction efforts could be derailed.
“If the retirement age and contribution period continue to rise after 2027, as currently proposed, the cost in the medium term will also remain limited… But the risks are likely to be towards a longer suspension (especially if pension reform remains a contentious issue ahead of the 2027 presidential election) which will have a more significant impact on the outlook,” they said in an emailed analysis on Wednesday.
France’s independent ombudsman predictions The annual cost to public finances of the permanent suspension of pension reform is predicted to be 20 billion euros (0.5% of GDP) by 2035.
“France’s public debt will therefore increase by a further 3-4 percent of GDP over the next decade and stabilize at a level close to 130% of GDP,” they said. The ratio of France’s debt to GDP stood at 113% in 2024.
Open
Centrist government insists with Lecornu that fiscal consolidation remains its main mission saying It is targeting a budget deficit of 4.7% of GDP in 2026, it said on Tuesday. That’s down from 5.5% of GDP this year.
But he insisted the budget would not be geared towards austerity and hinted he would seek an “exceptional budget”, with Lecornu avoiding outlining a wealth tax in his policy plans. [one-off] Contribution of great fortunes”, without giving further details.
Claudia Panseri, chief investment officer for France at UBS, said France’s financial situation is unlikely to improve significantly even if the government passes its 2026 budget.
“We predict that France’s debt/GDP ratio, which is currently at 113 percent in 2024, will worsen by 2-3 percent.”
Panseri said in his analysis on Wednesday that there is annual growth of percentage points in the medium term, and UBS expects the deficit to remain above 5% in 2026.
He added that investors with global portfolios should consider reducing exposure to long-term French government bonds and monitor developments closely as “political shocks in France could have spillover effects to broader European markets.”
Shorter-dated French bonds are less sensitive to debt concerns and offer good yield levels due to their lower default risk, Panseri said.
