Political turmoil has once again gripped France, following the ousting of Prime Minister Francois Bayrou and his centrist minority government due to an inability to secure support for critical budget proposals. This latest political upheaval came after Bayrou faced a confidence vote in the National Assembly, with 364 lawmakers voting against his government compared to only 194 in favor.
The collapse of Bayrou’s administration was anticipated, stemming from his failure to rally political adversaries behind 2026 budget plans designed to address France’s substantial budget deficit, which is projected at 5.8% of GDP in 2024. The government aimed to make cuts amounting to approximately 44 billion euros ($52 billion) to reduce the deficit to 4.6% of GDP by the following year.
Despite the political uncertainty, France’s financial markets responded relatively calmly, with the CAC 40 index opening 0.25% higher shortly after the announcement. However, the yield on the nation’s benchmark 10-year bond ticked up by 2 basis points, reflecting lingering concerns over the ongoing political and economic instability.
As Bayrou prepares to submit his resignation to President Emmanuel Macron, discussions are underway regarding the formation of a new government to be established within days. Macron faces a difficult decision: appointing a new prime minister—marking the fifth such appointment in less than two years—or potentially forming a technocratic government. Both options, however, are expected to encounter similar political opposition regarding budget cuts. A snap parliamentary election is also a possibility, yet such a move could yield inconclusive results or further empower extremist factions like the far-right National Rally or the far-left France Unbowed party.
Analysts predict that Macron may opt for another centrist ally to lead the government, but finding a candidate who can navigate the various demands from the political spectrum will be challenging. Analysts at Deutsche Bank noted the importance of a prime minister capable of mediating between the far-right, far-left, and the central political forces to ensure support for upcoming budget measures.
As negotiations unfold, Raphael Brun-Aguerre, a senior economist at JPMorgan, emphasized that while a new lower house election remains a possibility, Macron is likely to pursue a grand coalition government. In this turbulent political landscape, the new government will likely focus on fiscal consolidation to address the dire state of France’s public finances.
This consensus on the necessity for fiscal reform, however, is complicated by deep divides among political groups regarding strategies for implementation—whether through welfare reforms or tax increases. Carsten Nickel, deputy director of Research at Teneo, pointed out that while there is recognition of the urgent need for financial intervention, the absence of “grand coalitions” in French political culture makes achieving substantial compromise difficult.
Additionally, the incoming prime minister will face public dissent in response to proposed austerity measures, as unions have announced plans for nationwide protests on September 10 and September 18. Importantly, as the urgency for budgetary reform grows, upcoming assessments from credit rating agencies like Fitch Ratings could further influence the political landscape; the agency is set to release its update on France’s economic rating, currently at ‘AA-‘ but designated with a negative outlook.
Holger Schmieding, chief economist at Berenberg Bank, cautioned that while the possibility of a credit ratings downgrade looms, a full-scale financial crisis remains unlikely at this time. He noted that despite the current challenges, France’s balanced current account positions it as a less probable candidate for a financial crisis—though the risks could escalate if political factions continue to resist practical solutions.
