Markets have steadied after the appointment of the Lecornu II administration, yet lingering political and fiscal vulnerabilities persist.
Keeping the government in office will require concessions, including a more flexible budgetary stance than initially envisaged. Consequently, both France’s political balance and public finances are likely to remain precarious until the 2027 presidential election.
Such uncertainty is likely to weigh on growth, which should remain subdued in the tail end of 2025 and into 2026, reflecting fragile private demand and a weakening business climate. Household savings have risen sharply amid concerns over taxation, pensions, and employment.
In addition, France faces structural challenges: public debt is poised to exceed 125% of GDP by 2030 unless there is some form of meaningful consolidation, while the 2026 budget deficit may hover around 5% – well above government targets. Borrowing costs are rising and credit-rating agencies have already started to downgrade the country, with further cuts expected should the political deadlock persist.
Against this backdrop, a key question arises: has the bond market fully priced in the country’s political and fiscal risks, or is there still a danger that the OAT–Bund spread will widen further? While much of the near-term impact appears to be reflected in the current pricing, medium-term debt sustainability hinges on disciplined fiscal management and reforms to lift growth. The widening OAT–Bund spread not only reflects the immediate political uncertainty but once again raises more profound questions about France’s long-term fiscal trajectory.
With political fragmentation constraining any meaningful reforms, genuine fiscal austerity appears inevitable after the 2027 presidential election.
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The opinions expressed herein are correct as at 21 October 2025 and are subject to change without notice. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
