France on Tuesday appointed its fourth prime minister in 12 months as the country confronts soaring borrowing costs, a budget deficit well above European Union rules and a deeply divided parliament that has so far resisted measures to put public finances on a sustainable path.
President Emmanuel Macron named Sebastien Lecornu to succeed Francois Bayrou after the National Assembly toppled Bayrou in a confidence vote following his proposal to eliminate two public holidays and cut 44 billion euros ($55.4 billion) in spending. Lawmakers have repeatedly rejected austerity measures, leaving investors increasingly uneasy about France’s ability to control its deficit.
The immediate fiscal picture has deteriorated sharply since France last balanced its budget in 1973. Generous welfare programs and strong worker protections were affordable so long as steady economic growth boosted tax revenues and interest rates remained near zero. That environment began to change with the COVID-19 pandemic and accelerated after Russia’s 2022 invasion of Ukraine, which triggered an energy shock and prompted heavy government subsidies to shield consumers and businesses from rising bills.
Debt that had been manageable due to low borrowing costs jumped from about 98% of gross domestic product in 2019 to roughly 114% in 2020, and it has remained elevated. Last year’s budget deficit ballooned to 5.8% of GDP, topping the EU’s 3% ceiling and worrying markets that demand higher yields on French bonds to compensate for political and fiscal risk.
France’s debt burden remains smaller than some peers — Greece’s debt is about 152% of GDP and Italy’s about 138% — and lower than the United States, at roughly 119%. But analysts note France lacks the advantage of issuing the world’s dominant reserve currency, a factor that eases borrowing for Washington. Bond markets now treat French debt as relatively riskier than some heavily indebted peers: Greek 10-year yields trade around 3.3%, a level that suggests markets currently price Greece as less risky than France.
Taxes in France are high, at about 43.8% of GDP, the highest in the European Union, and public spending is substantial for pensions, civil servant pay and increased defense outlays. Rising global interest rates have pushed France’s annual interest bill to roughly 67 billion euros, money that cannot be used for schools, pensions or health care.
Economists say the scale of required fiscal adjustment is significant. "With a deficit that big, France will have to enact some mix of tax increases and spending cuts equal to around 5% of GDP over the next several years," said Zsolt Darvas, a senior fellow at the Bruegel think tank in Brussels. He added that while such a correction is possible — noting Greece enacted larger adjustments after its debt crisis — it would be politically painful.
The political dynamics that produced the deadlock began after Macron’s centrist party performed poorly in European Parliament elections, prompting him to call new legislative elections last year. The resulting National Assembly is fragmented: a leftist coalition faces an ascendant nationalist party led by Marine Le Pen, with centrists in between. That fragmentation has repeatedly undercut attempts to pass fiscal consolidation.
The succession of prime ministers — Gabriel Attal, Michel Barnier, Francois Bayrou and now Sebastien Lecornu — has underscored the challenge of building a parliamentary majority for tough budget decisions. Bayrou’s defeat in a confidence vote left investors questioning when legislators would confront the deficit problem.
Market reactions reflect those doubts. When governments run persistent deficits they finance them by selling bonds; confidence that a government will manage its finances keeps borrowing costs low. The political impasse has eroded that confidence and pushed investors to demand higher yields on French debt, raising the government’s interest bill and complicating efforts to reduce deficits.
Analysts warn of the theoretical risk of a self-reinforcing ‘‘doom loop’’ in which higher borrowing costs widen the deficit and further raise yields. Holger Schmieding, chief economist at Berenberg, described such a severe financial crisis as "quite unlikely for the time being" but said the risk could rise if legislators continue to reject measures to restore fiscal sustainability. His base case is that France will "muddle through" with mediocre growth, somewhat higher borrowing costs and only modest deficit reduction.
In an extreme market panic that threatened France’s ability to borrow, the European Central Bank could step in to buy French bonds and lower yields. But the ECB has signaled it would offer such support only to countries pursuing "sound and sustainable" policies. Rescue aid from the eurozone’s European Stability Mechanism or the International Monetary Fund would carry even stricter fiscal conditions, and would not eliminate the need for France to cut spending or raise revenue.
Darvas cautioned that no outside rescue would spare France from making hard choices. "It’s very hard to imagine that France, such a big and proud country, would go cap in hand to the ESM and possibly the IMF," he said. "So again we come back to the same position... that in whatever world, France will have to do the fiscal adjustment."
The new government led by Lecornu faces the immediate task of restoring market confidence while navigating a parliament that has repeatedly rejected austerity and remains split on the balance between tax increases and spending cuts. How quickly and effectively the administration can secure support for a credible fiscal plan will determine whether France can avoid further upward pressure on borrowing costs and avert the deeper financial crises that afflicted some European neighbors in the past.