France's fiscal reckoning Rien ne va plus

France's elections could reshape its fiscal future, but political gridlock and pressure on European assets may persist.

France is caught in a fiscal storm that is proving difficult to contain. The recent protests and riots are a symptom of an economic model that has reached its fiscal limits. Consequently, French assets have been among the hardest hit in the recent European sell-off, as investors focus on the country's increasingly challenging fiscal outlook: public debt stands at 115% of GDP, the budget deficit is around 5%, and rising borrowing costs are adding to the strain. France is now the only G7 nation whose government debt remains above its pandemic peak (Figure 1).

Yet the real constraint is political rather than fiscal. France lacks a stable governing coalition capable of reducing the deficit or even preserving the status quo. Two governments have already fallen over fiscal consolidation efforts since the 2024 snap election, and the current standoff could bring down a third. Until this political deadlock is resolved, there is little prospect of tackling the country's underlying fiscal challenges.

Elections offer a potential route out of the gridlock

France will shortly hold national elections that could determine whether the country's political paralysis finally ends. Effective governance requires a president backed by a workable legislative majority. At present, the most likely outcome appears to be a Marine Le Pen presidency alongside a Rassemblement National (RN) plurality in the National Assembly.

While the presidential election in April-May will attract most attention, it is the subsequent legislative vote that may prove decisive. The key question is whether RN can secure an outright majority, giving it the mandate needed to govern and implement policy.

So how does France get back onto a credible fiscal path?

Today, policy remains paralyzed (Figure 2, lower-right box). Without a political breakthrough, the route to fiscal consolidation may ultimately run through a bond-market crisis, the Crash path, which forces difficult policy choices. Elections offer an alternative. A Le Pen presidency and RN-led government could pivot towards fiscal restraint, the “Meloni” path. Alternatively, a fragmented government could maintain or even accelerate the current trajectory, the “Liz Truss” path. The former would likely reassure markets; the latter would bring a bond-market confrontation forward.

The odds still favour continued paralysis

In 2024, cooperation between the left and center denied RN a majority. Despite securing more than 30% of the vote, it won only around 20% of seats in the National Assembly. Today, RN's path to a majority depends less on rising popularity than on a more fragmented opposition. The electoral system that worked against RN in 2024 could therefore work in its favor next time.

However, with support still well below 50%, and anti-RN voters likely to mobilize behind rival candidates if Le Pen wins the presidency, we estimate the probability of an outright RN majority at around 20%. That leaves an 80% chance that France remains trapped in the Status quo path: political gridlock persists, fiscal policy remains paralyzed, and the underlying fiscal problem goes unaddressed.

The ECB is unlikely to stand in the way of market discipline

Given France's size, any sovereign stress should matter for the euro area. The recent sell-off in European assets has invited comparisons with the 2011-12 sovereign debt crisis (Figure 3). However, spreads remain well below the levels that prompted the European Central Bank (ECB) to intervene at that time. Moreover, the ECB now has backstop facilities that did not exist during the last crisis. As a result, there is little reason for the ECB to prevent markets from exerting pressure on policymakers and forcing the fiscal choices France has so far avoided, at least for now.

Investor implications

• France is likely to remain on an unsustainable fiscal trajectory regardless of the election outcome. Governability is unlikely to improve without a market shock, and such a shock is becoming increasingly difficult to avoid. With the ECB showing little inclination to shield France from market discipline at current spread levels, further weakness in French government bonds (OATs) remains likely.
• Given France's size, spillovers to broader European assets will be difficult to contain. While the ECB retains the tools to prevent an existential threat to monetary union, any eventual intervention would likely come only after significant market stress and could be accompanied by a weaker euro over the coming year.