French Prime Minister Michel Barnier won a brief respite in his uphill battle to secure approval for the country’s 2025 budget and maintain his government’s shaky hold on power. This comes after S&P Global Ratings reaffirmed its AA- credit rating for France, a critical lifeline for the nation amidst mounting political and economic turbulence.
The reaffirmation comes as France grapples with deepening fiscal challenges and political fragmentation. In its statement, S&P acknowledged the resilience of the eurozone’s second-largest economy, crediting factors such as labor market reforms initiated under President Emmanuel Macron, robust private-sector savings rates, strong exports, and European Union membership.
S&P’s decision to maintain France’s AA- rating — seven notches above junk status — underscores cautious optimism. This places France on par with the Czech Republic and Slovenia, despite the growing risks to fiscal stability and governance.
“Rising political fragmentation is complicating fiscal governance, most notably by delaying the approval of a credible 2025 budget,” S&P noted in its analysis. However, the agency expressed confidence that French authorities would pursue fiscal consolidation to reduce the budget deficit by nearly 1% of GDP in 2025, part of a broader medium-term strategy to address the deficit.
The outlook offers some solace after S&P’s downgrade in May, which was quickly followed by a political crisis triggered by Macron’s call for snap elections. The election failed to yield a clear majority in the National Assembly, leaving the legislature fractured among three blocs: the left, Macron’s diminished centrist coalition, and the surging far-right National Rally led by Marine Le Pen.
The fragmented political landscape has hindered effective governance, exacerbating fiscal woes. Macron’s appointment of Barnier to lead a minority government in September marked a renewed effort to stabilize the situation, but challenges remain steep.
Initial budget projections for 2024 anticipated a deficit reduction to 4.4% of GDP, but the actual figure is now expected to reach 6.1%. The shortfall stems from underperforming tax revenues and stalled efforts to repair public finances.
To address these issues, Barnier’s government has proposed a 2025 budget targeting a deficit reduction to 5% of GDP. The plan includes €60 billion ($63.3 billion) in tax hikes and spending cuts. Yet, the proposal faces strong resistance from opposition parties. Le Pen’s National Rally and leftist groups have signaled their willingness to block the budget and potentially topple the government through a no-confidence motion.
The rising political risk has reverberated in financial markets, putting pressure on French government bonds. The spread between French and German 10-year bond yields widened to 90 basis points in recent weeks, its highest level since 2012, before narrowing slightly to 81 basis points on Friday.
This volatility reflects market concerns over France’s ability to navigate its fiscal challenges, especially as the European Central Bank signals potential interest rate cuts.
In an effort to placate opposition lawmakers, Barnier has made concessions on the 2025 budget. However, these compromises risk undermining the extent of fiscal consolidation, raising doubts about the government’s ability to meet deficit reduction targets.
Le Pen has intensified the pressure, demanding adherence to her party’s policy priorities. She has given Barnier until Monday to comply with her conditions or face a no-confidence motion. Such a motion could materialize as early as Wednesday, coinciding with Barnier’s expected invocation of Article 49.3 of the French Constitution. This provision allows the government to bypass a parliamentary vote to adopt legislation, but it also heightens the risk of political backlash.
Even if Barnier survives the immediate no-confidence challenge, more votes are anticipated in December as the broader budget debate continues.
Despite the reaffirmation of France’s credit rating, S&P issued a sobering assessment of the nation’s fiscal trajectory. The agency now predicts the 2024 budget deficit will end at 6.2% of GDP, up from previous forecasts.
“The starting point for France’s fiscal adjustment is a difficult one,” S&P cautioned. The agency warned that it could downgrade France’s rating in the future if the government fails to reduce its deficit or if economic growth falls below projections for an extended period.
Finance Minister Antoine Armand expressed cautious optimism following S&P’s decision, highlighting the government’s commitment to fiscal discipline while acknowledging the risks posed by political instability.
Should political gridlock prevent the passage of a 2025 budget, France may resort to a contingency measure known as a fiscal continuity law. This would allow the government to collect taxes and pay public-sector salaries, with spending capped at 2024 levels, until a new budget is enacted.
Such a scenario would avoid a full government shutdown but would complicate efforts to address France’s long-term fiscal challenges.
The ongoing budget crisis and political turmoil highlight the fragility of Macron’s presidency in its second term. His decision to dissolve the National Assembly and call snap elections has backfired, leaving his government reliant on a tenuous coalition to push through critical reforms.
Meanwhile, Le Pen’s National Rally continues to gain momentum, capitalizing on public dissatisfaction with the government’s handling of economic and social issues. The far-right leader’s growing influence poses a direct challenge to Macron’s vision of a centrist, reform-oriented France.
As Barnier braces for a no-confidence vote next week, the stakes are high for France’s political and economic future. A successful challenge could topple the government, further destabilizing the country and undermining investor confidence. Conversely, even a narrow survival could leave the administration weakened and its fiscal plans in jeopardy.
With S&P’s rating reaffirmation providing only temporary relief, the coming weeks will be pivotal in determining whether France can chart a path toward fiscal stability or spiral deeper into political and economic uncertainty.
France’s budget crisis, set against the backdrop of a divided National Assembly, serves as a stark reminder of the challenges facing democracies worldwide as they grapple with polarized politics and mounting fiscal pressures.
