Charles de Gaulle once noted that you cannot govern a country (like France) with 246 varieties of cheese. With this he reflected on the relationship between the different food you eat in different regions in France, and the different political identities held by French in different regions, resulting in the great difficulties of governing France from the presidential palace.
Recent events suggests that things may not have improved much in recent years for France’s political leaders in Paris, and there remains next to no chance by now of an on-time budget for 2026 or meaningful fiscal consolidation in the next two years. Meanwhile the risk of another early election later this year has increased, though remains less than 50 percent. Investors should expect continued French government bond deterioration, including relatively to other large euro area countries like Italy, in the coming weeks and months.
This week President Macron – finally after an unusually long period of time between nominating the prime minister and then the rest of the government – named what was to have been the entire new cabinet of Prime Minister Lecornu. Except that this was followed by the Prime Minister’s resignation, following a political dispute over some of the appointments in the new cabinet between Macron’s LR party and their coalition partners among the Republicans. It appears that Macron has insisted on essentially running the political process of forming the new government, without wanting to let Lecornu (a Macron loyalist) or his parliamentary coalition partner have any real influence on the cabinet selection. This saw a new cabinet named consisting almost wholly of existing or former Macron appointed ministers, causing unease among the Republicans and ultimately triggered the resignation of Lecornu.
Certainly, the new cabinet named by Macron cannot be said to have been representing a “turning of the political page”, but perhaps the most damaging element of Lecornu’s attempt to find a majority for next year’s budget was his apparent unwillingness to contemplate significantly less fiscal consolidation for 2026 than previously proposed by his predecessor Francois Bayrou. Lecornu proposed a deficit next year of 4.7 percent to Bayrou’s 4.6 percent, while allegedly offering some higher taxes for high income Frenchmen to appeal to the Socialists, but evidently no materially smaller overall fiscal tightening next year.
While on the one hand there is no doubt that France needs a dramatic medium-term fiscal consolidation – roughly from the current 4 percent primary deficit to a at least 1 percent primary surplus – it has been clear for quite some time that there is no majority for such measures in the current French parliament. It is hence not surprising that Lecornu has failed in trying to do what Bayrou also could not earlier this year. Lecornu’s resignation has not been accepted yet by Macron, and he remains still be tasked with continuing negotiations with other parties, and as such could become a sort of “zombie caretaker government leader”, unless actively removed by Macron to make room for another prime minister or another early election.
Meanwhile, it is now clear that only Le Pen’s RN party wants early elections, as they look likely to win and will be betting that there won’t be a new “left electoral alliance” (a Nouveau Front Populaire 2) between the far-left and the center-left Socialists and Greens in any early elections. Policy differences and personal animosity between far-left leader Jean-Luc Melenchon and the center-left appear much wider today than ahead of the early 2024 elections, making this “Alliance of the Left” quite unlikely again later this year. In France’s two-round parliamentary election system, this will give Le Pen’s RN a significant advantage as the largest single party, and RN would be the clear favorite to win another early French parliamentary election.
This, however, also implies that the Socialists and Greens in the end are much less keen on early elections than Le Pen, and that a plausible fiscal deal between them and the centrists and Republicans might in the end be possible. This though, as noted, will require that material fiscal consolidation for 2026 is abandoned, and possibly that some form of measure is implemented to “politically replace” the Socialists’ current wealth tax proposal, which will not be acceptable to the political center/center-right.
As discussed in earlier notes, the current situation is not very different from last year, when the 2025 budget was also late, and didn’t see material consolidation. Given the traditional 70day parliamentary negotiation period in France, it is by now almost a given (the 70days can still be sped up) that also the 2026 budget will be delayed into next year setting up another case of “French Continuing Resolution situation”, where the 2025 budget continues to apply into at least early 2026 when a new budget is eventually approved.
It is important to note, however, that continuing the 2025 budget into 2026 would not be similar to a fiscal status quo, but would see higher deficits likely close to 6 percent on an annual basis due just to lower growth and lower revenues in 2026. A delayed budget is therefore a potential accelerator of market concerns and higher yields towards the end of 2025, an important political pressure point to ensure that a 2026 budget is eventually agreed in the French parliament.
Ultimately, from an investor point of view, it is less important who is prime minister – Macron could appoint a former Socialist, too, next – than whether the person appointed will be given the political space by Macron to negotiate a less ambitious budget consolidation. Lecornu was clearly not and failed to get a budget passed. There accordingly does not appear to be many political scenarios where the French 2026 deficit does not exceed 5 percent of GDP and probably essentially will equal the expected 5.4 percent for 2025.
Arguably the only realistic (many fiscally improbable outcomes for France in another early election can be imagined!) political scenario in France for a somewhat less expansionary budget in 2026 is one in which an early election is called, and Le Pen wins it convincingly and leads the next government. This would likely compel the RN to – once in power – govern with a higher degree of fiscal credibility than current centrist minority governments, as the party tries to position its candidate to win the 2027 presidential election. Importantly, such an outcome would not mean that France was suddenly likely to be put on a credible medium-term fiscal path – Le Pen has never presented a credible plan to restore French fiscal sustainability – it would merely mean that France would have a government able to pass a new 2026 budget and a political incentive to achieve just a modest fiscal stabilization. A new Le Pen government would not solve French longer-term fiscal issues, but wouldn’t make them immediately worse either, so a possible RN victory should likely be viewed as marginally fiscally hawkish relative to the current outlook.
Lastly, it is worth again underlining that Macron’s early resignation before his terms expires in 2027 remain extremely unlikely, despite the recent political chaos in Paris. The real casualty from recent events is rather Macron’s political legacy in France, where he is increasingly likely to become a one-off political gadfly unable to create a centrist political party that will outlast his own time in office. His “revolution from the center” in 2017 was idiosyncratic for that year, and will have no lasting impact beyond his ten years in office. This in turns makes it very open, which candidate(s) emerge from the French political center to challenge Le Pen and the far left’s Melenchon in the 2027 presidential election’s second round. Recent events may make it less likely that a centrist candidate will make it to the second round, setting of a far left vs. far right contest in 2027 that Le Pen would be virtually certain to win.
Jacob
