France seeks to appease protesters without widening deficit

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France protest and budget deficit

Highlights

French 10-year bond yields hit 5 per cent last week, reflecting investor concern over rising deficits and political risk ahead of April's presidential election.
Prime Minister Lecornu announced €1bn for universities, €4bn in loans for school renovations, and 15,000 student places, but pledged not to widen the deficit beyond the 5.4 per cent forecast for 2024.
The 2025 budget proposes €43bn in spending cuts and tax rises, but parliamentary gridlock and further protests threaten implementation, with the government considering constitutional measures to pass reforms.

Budget strategy amid market and social strain

As reported by the Financial Times, Lescure says France has to prove to markets that it can stabilise its finances and restore confidence without treating new protest concessions as a reason for a wider deficit.

French borrowing costs have climbed to levels not seen in a quarter century, with investors penalising the country for failing to bring public spending under control. Markets are also watching the presidential election in April, where Marine Le Pen is polling first, adding to concerns that political instability could complicate fiscal consolidation.

Lescure describes Moody's decision last week not to downgrade France as a sign of confidence, even as the ratings agency highlights the challenges still facing the economy. He argues that reviving consumer and business confidence remains essential to lifting growth.

The minister says the government cannot respond to unrest with large new spending packages similar to the 2019 measures used to calm the Yellow Vests movement. Instead, he points to measures aimed at lowering fuel costs, including additional diesel supplies secured from Middle Eastern producers and the release of extra strategic petrol and diesel reserves.

Concessions, deficit targets and parliamentary risk

Prime Minister Sebastien Lecornu on Monday announces concessions for students, including 15,000 new places in universities and trade schools, €1bn for universities over five years and €4bn in loans to regions to accelerate school renovations. But labour unions and protesters continue to press for broader action on the rising cost of living, with more demonstrations planned for Saturday and the following Thursday.

Lescure says any further spending would need to be offset by savings elsewhere. France is targeting a deficit of 5 per cent of GDP in 2027 after posting 5.1 per cent last year, and the shortfall is forecast to widen to 5.4 per cent this year.

The yield on France's 10-year bonds reached 5 per cent last week before easing on Monday after the Moody's reprieve, while the spread over German Bunds has roughly doubled in the past three months. Lescure says pressure on short-dated bonds earlier this month is largely linked to the unwinding of carry trades by hedge funds and other investors.

The government has proposed a deficit-cutting budget for next year with €43bn in cuts and tax rises, but it lacks a parliamentary majority. Lescure downplays amendments and rejected spending cuts, saying constitutional tools such as article 49.3, and potentially a budget decree, remain available if needed, even as opposition parties warn they could try to bring down the government.

Despite the market volatility and street unrest, Lescure urges households to keep confidence in the economy and spend more. He says France's high household savings rate, which averages 17.9 per cent at the end of 2025, could become an important driver of growth if uncertainty starts to ease.

France’s push to restore investor confidence has been tested by political uncertainty and a sharp rise in borrowing costs, keeping markets focused on whether the government can deliver on its deficit targets. Our earlier article outlined plans to bring the deficit down toward 3% of GDP by 2029, noting that stress in OAT markets was being driven largely by concerns over budget approval and credibility, even as officials argued consolidation is achievable without austerity.

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