French economy stalls as budget deadlock fuels concerns over public finances
France has seen no growth since the start of the year, and GDP fell by 0.1% between July and September. How can financial credibility be restored as the government urges political forces to adopt the 2027 budget? Analysis.
A disappointing 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 shrinking by 0.2 % in the first.
This is another blow for the government, coming as France’s borrowing rates climbed above 5 % on the financial markets last week and social tensions remain high, on the eve of a new nationwide day of protest against the high cost of living and in support of young people’s demands.
This decline in activity effectively leaves the eurozone’s second-largest economy on the brink of recession. At the same time, inflation picked up, reaching 3.4 % year on year in October, compared with 3.1 % in September. This is its highest level since January 2024, according to Insee.
The poor figures do not come as a surprise to experts, given a particularly unfavourable macroeconomic environment. "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 turmoil and the rout on the bond market," he added.
"We are going to hit the wall"
The government has been shaken and is insisting on the need to get the 2027 budget passed on time, in a parliament where it has no majority.
Speaking on the Franceinfo set, 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 "recovery" budget is not adopted.
If parliamentary debates fail, the government is not ruling out recourse to article 49.3 of the Constitution, which allows a bill to be adopted without a vote unless a no-confidence motion is passed. Another option would be governing by decree through ordinances, a procedure that has never been used to pass a budget since the creation of the Fifth Republic in 1958.
"The main risk for the French economy is not the lack of a budget"
According to Jérôme Mathis, professor of economics at Paris-Dauphine University and author of the blog "La finance au cœur de nos vies" (source in French), adopting a budget is not "decisive" given 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 just getting the government’s bill through parliament, but giving investors medium and long term visibility over the trajectory of France’s public finances.
Jérôme Mathis points out that France is now in a situation where its financing costs are rising rapidly. "Each increase in interest rates gradually feeds through to the state budget, reduces future room for manoeuvre and ends up weighing on private investment." From a certain point, the expert warns, budget uncertainty itself becomes a drag on activity: "Companies postpone some investments, households put off some spending and markets demand a higher risk premium."
On Friday, the yield on 10-year French bonds stood at 4.9 %, 0.17 point below the peak reached on 22 October. The French-German spread, which measures the gap between the two countries’ borrowing rates, was around 1.55 point.
"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", notes a strategic memo written by Jérémie Peloso for BCA clients and seen by Euronews.
"The main risk for the French economy is not the absence of a budget. It is the lack of visibility over the path 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 ordinances, the professor does not see in it "an obvious economic solution". In his view, markets do 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 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 impact on confidence could be limited", explains Jérôme Mathis.
This, in his view, is precisely what sets the current situation apart from more "classic" budget crises: markets do not doubt France’s technical ability to raise taxes or repay its debt. "They have more doubts about 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.
