France on the brink: how political instability fuels the public debt crisis
- Tommaso Paletti
- 8 hours ago
- 7 min read
Context
On 8th September 2025, former Prime Minister of France François Bayrou asked the Assembly for a vote of confidence that resulted in a heavy defeat with 194 votes in favor of the government and 364 against. The motion was directly tied to the austerity budget for 2026, unveiled by Bayrou during the summer. In response, President Emmanuel Macron appointed Sébastien Lecornu, ex-Minister of the Armed Forces and Veterans Affairs, as Prime Minister on 9th September. However, Lecornu resigned less than 14 hours after presenting his cabinet on 6th October, and only 27 days after his appointment. His government became the shortest-lived in French history. On 10th October, Lecornu was re-appointed as Prime Minister and survived two votes of no confidence 6 days later by freezing the unpopular pension reform until after the 2027 presidential election and removing Bruno Le Maire from his cabinet. Concessions that proved crucial in keeping his second government afloat.
Fiscal (and political) paralysis
France’s 2026 fiscal plan has been thrown into disarray by a familiar yet worsening crisis of political instability, a phenomenon neither new nor isolated, but deeply tied to the country’s fiscal troubles.
The roots of this political turmoil can be traced back to 2024 when President Emmanuel Macron dissolved the National Assembly following the disappointing results of his Besoin d’Europe list during the European Parliament elections. The new vote produced a sharply divided legislature. After the National Rally (Rassemblement National) led the first round with about 33.2% of the vote, the left-wing and moderates withdrew hundreds of candidates for the second round in order to prevent the far-right to be the dominant party of the Parliament. This tactic, known as Front Populaire, is a common strategic move that has characterized French politics over the course of its recent history.
Figure 1: Division of seats in the National Assembly after the 2024 legislative elections and their comparison with the 2022 results.
Illustration: Statista
This political impasse is related to the fiscal paralysis France is undergoing. As a matter of fact, the newly appointed Prime Minister Sébastien Lecornu is expected to propose a budget aiming to reduce the deficit to 4.7 % by end-2026, a target he described as “ambitious” given parliamentary divisions. But even the draft bill reveals major fault-lines: roughly €17 billion in spending cuts and €14 billion in new taxes have been placed on the table, alongside the suspension of the controversial pension reform (saving only €400 million in 2026, and €1.8 billion in 2027).
Figure 2: France’s ageing system is becoming an economic fault line of its own. As shown in the Financial Times graphic above, French pensioners now enjoy higher average incomes than working-age adults, a rare and worrying situation among advanced economies.
Behind these numbers is a pattern of recurrent government collapses.
The paralysis in approving a coherent budget, marked by an unwilling majority, volatile alliances and fragmenting parties, has translated into delayed decisions, a weakened fiscal roadmap, and mounting scepticism among bondholders about France’s capacity to deliver meaningful consolidation.
Figure 3: Evolution of the French government budget balance (as % of GDP) over the last ten years.
Figure 4: Comparison between the German (light blue) and French (red) public debt trend as share of economic output (GDP) with their forecasts for 2026 (grey area).
France's fiscal woes are a product of the interplay between its budget deficit and its public debt. Each new deficit increases the stock of debt, and the higher that stock, the more Paris must spend on interest payments, further worsening the deficit. As borrowing costs rise and growth slows, this self-reinforcing cycle has grown more difficult to break. It is often reduced by economists to a simple rule: when interest rates exceed growth, debt tends to snowball unless the government runs a primary surplus. That's why investors focus as much on France's credibility and fiscal discipline as on the raw numbers, since a loss of market confidence can quickly turn a temporary shortfall into a structural debt problem and most importantly because (especially bond) markets do not trade on numbers, but on trust.
The return of the bond vigilantes
‘Bond vigilantes’ are shorthand for investors who discipline governments by demanding higher yields (or by selling bonds outright) when they judge fiscal plans to be weak or politically unworkable. They don’t set policy, but they set the price at which policy is financed. When confidence erodes, two things happen fast: the spread versus safer benchmarks widens and the rollover risk increases, because refinancing maturing debt becomes costlier. For a large issuer like France, even small moves in yields compound into billions in interest over time, tightening the budget and amplifying the feedback loop described above.
As a matter of fact, this French turbulence has not gone unnoticed. Fitch Ratings downgraded France on 12th September 2025 from AA- to A+ citing “persistent political turmoil” and “erosion of fiscal credibility”. Meanwhile, Moody’s Investors Service revised France’s outlook to “negative” on 24th October, warning that deferring reforms could “exacerbate the government’s fiscal challenges” but the most surprising move from The Big Three came actually from Standard & Poor's a week before: on 17th October, the agency downgraded France from AA to A+. Notably, the agency brought its review forward from late November. The effect was mostly symbolic: ratings actions typically lag markets, and French debt prices were little changed the following Monday, indicating the downgrade had been anticipated.
From the market perspective, the yield on 10-year French government bonds remains well above its decade-long average, and the key spread between French OATs (Obligations assimilables du Trésor) and German Bunds has widened by about 30 basis points between before the dissolution of the National Assembly and today.
The market’s reaction has been a textbook case of bond-vigilantes discipline. Downgrades and negative outlooks from the major rating agencies signalled rising execution risk, but investors had already priced in the political impasse: the OAT–Bund spread widened as funds demanded a premium to hold French paper, while the euro’s bouts of volatility reflected doubts about Paris delivering on consolidation. The mechanism is circular: a wider spread lifts France’s interest bill, which worsens the deficit unless offset elsewhere, which in turn sustains the spread. Short-lived relief rallies after tactical compromises (for example, postponing pension changes) fade unless the budget path looks credible beyond one fiscal year.
Figure 5: Comparison and evolution in the last three months between the 10-year French government bond yield (light blue) and the Italian equivalent (orange).
Investors were once willing to give France the benefit of the doubt, even as it racked up debt. Nowadays, as can be seen in the graph above, investors are demanding a risk premium to lend money to the French government. For the past 15 years, France benefited from comparison as southern euro-area economies faced repeated bouts of fiscal stress, and investors treated French debt as a relative safe haven. International investors wanted exposure to euro-denominated public debt in response to the 2008 global financial crisis. But the fiscally prudent northern member states, such as Germany and the Netherlands, issued too few bonds to satisfy them, and Greek, Portuguese and Spanish debt was deemed too risky. French bonds became attractive by comparison.
Since the 2010-12 sovereign debt crisis, however, Greece, Portugal, Spain and (in part) Italy have undertaken painful fiscal adjustments. France’s weak growth, high debt levels and volatile politics are not an attractive offer for investors now that other options are available.
Liberté, égalité, stabilité or contagion?
According to many analysts, this could be France’s worst political crisis since the birth of the V Republic in 1958. Even the two-round system no longer guarantees a stable majority in the Parliament. As explained before, the paralysis is real, and in front of this uncertainty economic agents choose to wait: firms do not invest, consumers do not spend and everyone postpone their most important decisions. It has been calculated that on average this paralysis costs approximately 0.3 growth points for this year.
With Macron term-limited for 2027 and the RN polling near one-third, the question is no longer whether Paris can meet its fiscal targets, but whether Europe can afford a prolonged crisis in its second-largest economy. Political fragmentation has turned France’s budgetary process into day-to-day survival rather than policy-design. Meanwhile mounting debt and weak growth threaten to erode the credibility that once anchored the eurozone’s core.
France’s credibility has eroded, both at home and abroad. When it negotiates with EU partners, its calls for fiscal leniency carry less weight. All this taking into account that together with Germany and Italy they represent about half of the European Union’s GDP, meaning any prolonged instability in Paris directly undermines the eurozone’s foundation.
Rising French yields have already begun to test the nerves of European bond markets, reviving the spectre of contagion that haunted the bloc during the eurozone debt crisis a decade ago. A sustained loss of confidence in Paris would not only push up borrowing costs across southern Europe but also challenge the EU’s fragile consensus on fiscal reform.
In the end, France’s crisis is Europe’s dilemma: how to reconcile national politics with collective stability. The Republic that once embodied liberté and égalité must now fight to defend a new third promise, stabilité, not just for itself, but for the continent it helped to build.
France’s debt crisis is no longer a matter of numbers but of confidence and confidence, once lost, is the hardest currency to regain.
References
Photograph,source:https://www.economist.com/europe/2025/10/06/frances-fifth-republic-is-in-unprecedented-turmoil
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