Nerves rush to Europe while France is heading for another political crisis

Tensions are likely to be raised in Brussels this week, because another political implosion in France leaves the country’s essential fiscal consolidation in the balance.

The second economy in the euro zone has repeatedly violated the rules of the European Commission on budget deficits and debt limits, and the successive primary ministers that have tried to solve the problem with the proposed reforms, the expense reductions and the tax increases have been escaped several times.

The latest martyr of the current political impasse in Paris – fifth PM in France in less than two years – is Sébastien Lecornu, who announced his resignation on Monday after only 27 days in mandate.

His decision to resign took place after he did not obtain political rivals (and even allies on the center-right) to support his new government. He had not even announced yet spending or tax plans in 2026, although the budget between the government and the rival parties was the loss of previous administrations.

Saying that it is desperate to avoid losing another PM, French President Emmanuel Macron on Monday evening gave Lecornu 48 hours to develop a plan for “stability of the country” and a means of crossing the political deadlock.

Lecornu wrote on X that he will come under the president on Wednesday evening on any potential breakthrough “so that he can draw all the necessary conclusions”.

It remains to be seen that more time is sufficient for the other political parties to be visible, with those on the far left and the right of the blood, calling for the resignation of Macron and new parliamentary and / or presidential elections.

It is unlikely that Brussels officials wish to seem to interfere in domestic political affairs, but the pressure is exerted by Paris to embark on a serious budgetary consolidation – and quickly.

France must close a budget deficit of 5.8% of GDP in 2024 and tackle a lot of significant debt which amounted to 113% of GDP last year. This has only put France behind Greece and Italy in terms of a debt of the European Union.

The two levels are well above EU rules demanding that the deficits of individual members do not exceed 3% of GDP, while their public debt should not exceed 60% of economic production.

France was placed under the EU’s “excessive deficit” procedure, applied to the Member States which do not respect the rules set out in the “Stability and Growth Pact”.

He has until 2029 to put his house in order, but there is no sign that France will be able to respect his obligations as soon as possible.

CNBC asked the European Commission to comment on the last crisis and awaits an answer.

“The question is how do you get to these rules (EU)?”, Specked Antonio Fatas, economics professor at INSEAD on Tuesday. “Currently, the deficit in France is clearly beyond the rules and it is not clear if the budget of France will lead you to the rules in a short time, which the rules require.”

“Given the composition of the Parliament, given the fragmentation, given the views of the extreme right and the extreme left, this means that it seems very, very difficult to make a budget that lives according to these rules,” he told “Europe Early Edition” of CNBC.

Although the EU can be ready to launch the can for the moment, investors may not be so willing to ignore the lack of budgetary discipline in France. The country has already undergone a degraded of Fitch ratings last month, the moodys that should follow the plunge at the end of October.

If Lecornu’s efforts in the coming hours fail, Macron will face the choice of appointing a new PM, dissolving parliament and calling for new parliamentary elections or resigning. We do not currently know which Macron option will choose, although this last resignation option is considered highly improbable.

In any scenario, economists say it is unlikely that there will be significant progress in reducing the country’s deficit or heap of debt, with a slowdown in growth also planned. In addition, the 2025 budget should be returned next year.

“Whatever the scenarios, we will not have an appropriate budget by the end of the year,” said Hadrien Camatte, principal economist for France, Belgium and the Euro area of ​​Natixis on Tuesday.

“So, in terms of budgetary consolidation at this stage, we do not see any very positive scenario, which means that the deficit is likely to remain close to the current level of 5.4-5.5% for this year, and probably for next year, according to the budget and the macro”, he told “Europe Early Edition” of CNBC.

Goldman Sachs also said on Tuesday that the “budget shift” probably in France had led the bank to increase its budget deficit forecasts from 2025 to 5.5% of GDP.

“Firstly, we continue to expect growth to take place below the trend … Second, we are still expecting to see little progress in reducing government deficit,” Goldman Sachs economists said on Tuesday in a note, adding that “it also seems that France will start next year with a frozen (or at least partial) budget”.

“In all cases, deep political disagreements, slower growth and higher borrowing costs are likely to prevent significant progress, and we increase our 2026 deficit forecasts by 0.1 percentage point to 5.3% of GDP,” they noted. Goldman also lowered its growth forecasts in 2026 for France, predicting a mediocre expansion of 0.8% next year.