Imminent French government collapse means deficit will stay high

France’s fragile coalition government looks set to lose a confidence vote scheduled on September 8. Consequently, Prime Minister François Bayrou’s deficit target of 4.6% of GDP now seems dead in the water, and the next government’s target will likely be much more modest, confirming our view that France cannot undertake meaningful fiscal consolidation in the current fractured political environment.

If the government does fall, in a repeat of the events of last year, President Emmanuel Macron will nominate another centrist prime minister, whose main goal will be to pass the 2026 budget. Though there will be some pressure on Macron to dissolve the National Assembly and hold a snap election, we see it as unlikely at this stage, as polls suggest it would not favour his party.

Given the fraught political environment, the priority for the new government will be to pass a budget without being toppled. This supports our view that, in the absence of a majority, meaningful fiscal consolidation will not take place before at least the presidential election of 2027, putting debt on a persistently increasing path.

Bond spreads have widened by around 10bps since Bayrou’s announcement, but we don’t expect them to rise much higher in the short-term and see limited risks of a major escalation in market tensions. Though the fall of the government is now set to happen earlier than most observers expected, markets had already priced in the risk of a government collapse this year.

Download the full report to discover how such a collapse would affect France’s economy.