French economy 'at a standstill' as budget uncertainty raises recession risk
France has seen no growth since the start of the year and GDP fell 0.1% between July and September. How can its financial credibility be restored as the government pushes political forces to adopt the 2027 budget?
A poor performance. French gross domestic product fell by 0.1% in the third quarter, the National Institute of Statistics and Economic Studies (Insee) said on Friday, after stagnating in the second quarter and a 0.2% decline in the first.
It is another blow for the government, coming as France's borrowing costs climbed above 5% on the financial markets last week and social tensions remain explosive, on the eve of another nationwide day of mobilisation against the high cost of living and in support of young people's demands.
This fall in activity effectively puts the euro area's second-largest economy on the brink of recession. At the same time, inflation accelerated to 3.4% year on year in October, from 3.1% in September. That is its highest level since January 2024, according to Insee.
The poor figures do not come as a surprise to experts, against a particularly unfavourable macroeconomic backdrop. "France is very likely to experience a technical recession in the coming quarters", Jérémie Peloso, chief strategist for Europe at BCA Research, told Euronews.
"This scenario was already conceivable before the recent budget turbulence and the collapse of the bond market", he added.
"We will hit the wall"
The government has taken the hit and is insisting on the need to have the 2027 budget adopted on time in a parliament where it has no majority.
Appearing on Franceinfo, Economy and Finance Minister Roland Lescure described the French economy as "at a standstill". He also warned that the country "will hit the wall" if the "turnaround" budget is not passed.
Should parliamentary debates fail, the government is not ruling out using article 49.3 of the constitution, which allows a bill to be adopted without a vote unless a motion of no confidence is passed. Another possibility would be to resort to ordinances, a procedure that has never been used to pass a budget since the Fifth Republic was established in 1958.
"The main risk to the French economy is not the absence of a budget"
According to Jérôme Mathis, professor of economics at Paris-Dauphine University and author of the blog "Finance at the heart of our lives" (source in French), adopting a budget is not "decisive" in that it would not, "through some kind of leverage effect, miraculously revive activity in the short term".
"On the contrary, a fiscal adjustment plan generally tends to weigh on growth immediately." The researcher stresses that the issue is not limited to getting the government's bill through parliament, but to giving investors medium and long term visibility over the trajectory of French public finances.
France is borrowing ever more expensively on the markets. "Each rise in interest rates is gradually passed through to the state budget, reduces future room for manoeuvre and ultimately weighs on private investment", Jérôme Mathis points out. Budget uncertainty can also become a drag on activity, he warns. "Companies postpone certain investments, households defer some spending and markets demand a higher risk premium."
On Friday, the yield on 10-year French government bonds stood at 4.9%, 0.17 points below the peak reached on 22 October. The French-German spread, which measures the gap between the two countries' borrowing costs, stood at around 1.55 points.
"Yesterday's ECB meeting, which was relatively free of surprises, certainly contributed to this easing, even though its president, Christine Lagarde, refused to comment on the French situation", according to a strategy note written by Jérémie Peloso for BCA clients and seen by Euronews.
"The main risk to the French economy is not the absence of a budget. It is the lack of visibility over the trajectory of public finances", says Jérôme Mathis. In this context, "the main economic cost of the current deadlock lies less in the content of the measures that would not be voted than in the prolongation of uncertainty".
As for a possible adoption of the budget by ordinance, the professor does not see it as "an obvious economic solution". In his view, markets certainly attach importance to the speed of political decisions, but also to their "legitimacy" and their "durability". A budget adopted by ordinance may reduce uncertainty in the short term, but is not enough on its own to restore long term fiscal credibility, the researcher warns.
"Markets generally prefer a contested decision to a prolonged absence of decision. But if a budget adopted by ordinance is seen as fragile, liable to be called into question after the presidential election or as revealing a lasting inability of the political system to build majorities, the positive effect on confidence could be limited", explains Jérôme Mathis.
This, in his view, is what distinguishes the current situation from "more conventional" budget crises: the markets do not doubt France's technical capacity to raise taxes or repay its debt. "They doubt more its ability to slow its increase."
"As long as this question remains, the pressure on interest rates is likely to persist, whatever institutional vehicle is chosen to adopt the budget", he concludes.
