France has seen no growth since the start of the year and GDP fell 0.1% between July and September. The government urges parties to pass the 2027 budget as its ability to reassure markets is in doubt. Analysis.
A setback. France’s gross domestic product fell by 0.1 % in the third quarter, the National Institute of Statistics and Economic Studies (Insee) announced on Friday, after stagnating in the second quarter and a 0.2 % decline in the first.
Another blow for the government, coming as France’s borrowing rates climbed above 5 % on financial markets last week and the social climate remains explosive, on the eve of a new nationwide day of mobilisation against the high cost of living and in support of young people’s demands.
This drop in activity effectively places the eurozone’s second-largest economy on the brink of recession. At the same time, inflation accelerated to 3.4 % year on year in October, compared with 3.1 % in September. This is its highest level since January 2024
The poor figures do not come as a surprise to experts, given a particularly unfavourable macroeconomic context. “France is very likely to experience a technical recession over the coming quarters”, says Jérémie Peloso, chief strategist for Europe at BCA Research, speaking to Euronews.
“This scenario was already conceivable before the recent budget turbulence and the rout in the bond market”, he adds.
“We will hit the wall”
The government has been shaken and is insisting on the need to have the 2027 budget adopted on time, in a parliament without a 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 “recovery” budget is not adopted.
If parliamentary debates fail, the government is not ruling out resorting to 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 is resorting to ordinances, a procedure that has never been used to pass a budget since the establishment of the Fifth Republic in 1958.
“The main risk for 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” , adopting a budget is not “decisive”, since it would not, “through some sort of leverage effect, miraculously restart activity in the short term”
“On the contrary, a budget adjustment plan generally tends to weigh on growth in the immediate future”. The researcher points out that the issue is not limited to getting the government’s bill passed, but to giving investors medium and long-term visibility on the trajectory of France’s public finances.
France is borrowing at increasingly high cost on the markets. “Each rise in interest rates is gradually reflected in the state budget, reduces future room for manoeuvre and ultimately weighs on private investment”, recalls Jérôme Mathis. Budget uncertainty can also become a brake on activity, he warns. “Companies postpone certain investments, households delay some spending and markets demand a higher risk premium”.
This Friday, the yield on 10-year French government bonds stands 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 rates, is around 1.55 points.
“Yesterday’s ECB meeting, which contained relatively few surprises, has certainly contributed to this easing, even though its president, Christine Lagarde, refused to comment on the situation in France”, states a strategy note 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 on the trajectory of public finances”, stresses 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 it as “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 lack 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 long-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 what distinguishes the current situation from more “classic” budget crises: markets do not doubt France’s technical capacity to levy taxes or to repay its debt. “They are more doubtful about its capacity to slow the pace of that debt”.
“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.
Source: www.euronews.com
