Political Instability and Policy Stalemate

At the beginning of the week, French Prime Minister François Bayrou faced a vote of no confidence in the National Assembly, a result of widespread opposition to his proposed €44 billion in government spending cuts. The defeat, which led to his subsequent resignation, was anticipated given the lack of cross-party support. President Macron, now in the process of appointing his fifth Prime Minister in 21 months, faces increasing challenges in presenting a coherent fiscal strategy.

France’s Debt Position

There is broad consensus that France’s public debt poses a serious issue. In a recent address to Parliament, Bayrou emphasised the inescapable nature of the current fiscal reality, stating, "You can bring me down but you do not have power to erase reality." France’s debt stands at €3.35 trillion, or approximately 114% of GDP, according to Eurostat. Only Greece and Italy report higher debt-to-GDP ratios within the Eurozone; however, both countries, particularly Italy, have made progress in recent years towards stabilising their financial positions.

Inability to Achieve Compromise

France has struggled to implement effective fiscal reform. Successive Prime Ministers have been unable to secure consensus within a polarised National Assembly. At present, widespread national strikes have been announced, with the “Bloquons Tout” (“Let’s Block Everything”) movement pledging active resistance to any proposed spending cuts. Public demonstrations are expected to escalate, maintaining France's traditional reliance on civic protest.

The Imperative for Reform

Despite the opposition, structural reform is widely regarded as essential. France’s 10-year government bond yields have recently increased to approximately 3.5%. Absent a credible fiscal plan, yields are likely to rise further, increasing borrowing costs. Failure to address excessive spending would necessitate higher taxes on individuals and businesses, with negative implications for competitiveness and inward investment. President Macron has expressed an intention to pursue further compromise with the newly appointed Prime Minister, Sébastien Lecornu. However, both right- and left-leaning parliamentary factions maintain that only a change in leadership will suffice, with the next presidential term review scheduled in two years.

Implications for the Eurozone

Continued political impasse in France poses wider risks for the Eurozone. As the bloc’s second-largest economy, ongoing uncertainty in France has the potential to undermine regional economic growth and competitiveness. These fiscal challenges have emerged amid heightened geopolitical tensions, including security concerns relating to Russia and intensified competition from China, India, and the United States. The lack of decisive leadership in France is contributing to broader economic and geopolitical uncertainty, an issue highlighted by Mario Draghi in his recent address in Rimini.

Conclusion

At present, most economic analysts assess that France’s fiscal difficulties remain largely contained. However, should the political deadlock persist and debt levels continue to climb, the probability of negative spillover effects across the Eurozone will increase, potentially impacting economic stability throughout the European Union.