Introduction to France’s Political Crisis
The political crisis in France shows no signs of abating. The resignation of Sebastien Lecornu as prime minister after just 27 days in office means the country will have an eighth prime minister in five years. Although President Emmanuel Macron is now expected to name another prime minister before the end of the week, potentially avoiding the need for new elections, the political unrest is having serious consequences for the EU’s second-largest economy.
The Budget Crisis
As in 2024, this means that the 2026 budget may not be agreed in time to be debated and adopted by the end of the year. Last year, due to political instability, the budget was “postponed” to 2025, meaning the old budget was used until a new budget was finally approved in February. Although this short-term solution avoids the risk of a US-style government shutdown, it does not help resolve France’s long-term economic problems, namely its debt and public finances.
The Debt Problem
Following the prime minister’s recent resignation, ratings agencies again warned about France’s underlying fiscal problems. Fitch, which downgraded France to an A rating last month, said the political situation made a solution to the country’s fiscal problems unlikely. Meanwhile, S&P Global stressed the need for France to introduce a budget that allows it to meet its EU treaty obligations, citing in particular the fact that France has for some time been flouting the strict credit and debt rules of the EU Stability and Growth Pact.
France’s Debt Increase
During Macron’s term in office since May 2017, government spending has increased significantly, while at the same time he has implemented far-reaching tax cuts. As a result, the country’s public debt increased by more than 1 trillion euros, although this was offset by a 30% increase in GDP growth over the period. A preferred measure by economists is debt as a percentage of GDP. France’s share of GDP increased to 114% from 101% in 2017. This is the third highest value in the EU, behind Greece and Italy.
Causes of the Debt Increase
France has not balanced its budgets in decades and typically outperforms other OECD countries when it comes to public spending. However, recent crises such as the COVID-19 pandemic, Russia’s war in Ukraine and a series of energy price shocks have led to a surge in spending that has led to ever-larger budget deficits. When Macron took office the deficit was 3.4%, but is now at 5.8% and rising. Prolonged political instability, which occurred after Macron called early elections in the summer of 2024 to fend off the right-wing National Rally (RN), has made tackling budget problems even more difficult.
Comparison with Italy
However, should the French political scene eventually stabilize, some experts see a role model it could follow when it comes to getting its finances in order: Italy. Although its neighbor still has a higher debt-to-GDP ratio than France at 138%, Italy’s financial situation has improved significantly in recent years and highlights that the budget deficit has fallen to 3.4%, close to the EU’s mandated rate of 3%. Italian Prime Minister Giorgia Meloni recently announced she expects Italy’s deficit to fall to 3% of GDP this year, which would allow Rome to exit the EU’s excessive deficit program sooner than expected.
Lessons from Italy
Melanie Debono, senior European economist at Pantheon Macroeconomics, says the Meloni government had acted "prudently" by cutting construction subsidies and making efforts to collect unpaid taxes, while still managing to reduce income and corporate taxes. She sees similarities in the Italian and French fiscal situations “in that both suffer from structural challenges associated with chronically high and rising spending and future liabilities, and a weak supply side in the economy that is struggling to generate enough revenue to cover committed spending.” However, she pointed out that since the sovereign debt crisis in the early 2010s, Italy has managed pensions and raised the age by three months every two years, except in certain special years when the increase was frozen.
France’s Need for Reform
France could follow suit, Debono argued, but stressed that Paris needs much more than pension reform to get closer to the EU’s 3 percent target. “France needs radical spending cuts and/or tax increases.” The French National Assembly, led by Marine Le Pen, would like to take part in the government. Still, Debono says there is no guarantee that the National Rally, should it eventually come to power, will exercise fiscal discipline. “RNs are tax/spend savers according to their program, but they will likely cut taxes primarily and find it very difficult to cut spending,” she said.
