France’s political crisis shows no signs of abating. Sébastien Lecornu’s resignation as prime minister this week after just 27 days in office means the country is set to get its eighth prime minister in a span of five years.
Although President Emmanuel Macron is now set to name another prime minister before the week ends — potentially preventing the need for new elections — the political turmoil comes with major consequences for the EU’s second-largest economy.
As in 2024, this means the 2026 budget may not be agreed upon in time for debate and passage by the end of the year. Last year, due to political instability the budget was “rolled” to 2025, meaning the old budget was used until a new budget was agreed upon in February.
Although that short-term solution prevents the risk of a US-style government shutdown, it does nothing to tackle France’s long-term economic problems, namely its debt and public finances.
debt problem
Following the resignation of the latest prime minister, ratings agencies issued new warnings about France’s underlying financial problems.
Fitch, which last month downgraded France to a single A rating, said the political situation meant resolving the country’s fiscal problems looked impossible.
Meanwhile, S&P Global stressed the need for France to implement a budget that enables it to comply with its EU treaty obligations, particularly referring to the fact that France has breached strict borrowing and lending rules from the EU’s Stability and Growth Pact for some time.
During Macron’s tenure since May 2017, public spending has increased significantly, while he has also drastically cut taxes. As a result the country’s national debt has increased by more than €1 trillion ($1.17 trillion), although this has been offset by a 30% increase in GDP growth over that time period.
A preferred measure by economists is debt as a percentage of GDP. France’s GDP has increased from 101% to 114% in 2017. This is the third highest rate in the EU after Greece and Italy.
France has not balanced its budget for decades and generally trails other OECD countries when it comes to public spending. However, recent crises such as the COVID-19 pandemic, Russia’s war in Ukraine and a series of energy price shocks have led to increased spending that has led to a steadily rising budget deficit.
When Macron came to office the deficit was 3.4% but is now 5.8% and rising. Ongoing political instability has made tackling fiscal problems even more difficult after Macron called snap elections in the summer of 2024 in an attempt to stop the right-wing National Rally (RN).
Those elections led to the national parliament becoming even more divided, with no political faction having an absolute majority – reinforcing the current instability.
Economist Alexandra Roulet of INSEAD Business School says spending, along with tax cuts, are the main reasons for the increase in debt during the recent crisis.
“These policies have proven disappointing in terms of their impact on the French budget,” he told DW. “The expectation was to boost investment and boost the economy in such a way that fiscal revenues would increase despite the tax rate reduction but we have not seen that happen.”
the Italian Job
Yet if the French political landscape eventually stabilizes, some experts see a model for it to follow in terms of getting its financial house in order – Italy.
While its neighbor’s debt-to-GDP rate is still higher than France’s, at 138%, Melanie Debono, senior Europe economist at Pantheon Macroeconomics, says the country’s “fiscal position has improved significantly in recent years,” highlighting that its budget deficit has fallen to 3.4%, close to the set EU rate of 3%.
Italian Prime Minister Giorgia Meloni recently announced that she expects Italy’s deficit to fall to 3% of GDP this year, allowing Rome to exit the EU program for countries with excessive deficits earlier than expected.
Speaking to DW, Debono said the Meloni government has been “prudent”, cutting construction bonuses and efforts to collect unpaid taxes, while still managing to cut income taxes and business taxes.
She sees similarities in the Italian and French fiscal situations “in the sense that both suffer from structural challenges related to long-term high, rising spending and future liabilities, and a weak supply side in the economy that is struggling to raise enough revenue to meet spending commitments.”
However, while the situation in Italy is improving, the situation in France is getting worse. “The French deficit is growing worryingly due to continued growth in spending and weakness in tax revenues,” he said.
In terms of direct things France can learn from Italy, she thinks the different political systems do not allow easy comparisons.
“It is not clear to us that relative stability in Italy can be used as a guide for what France should do,” Debono said. “France is not being helped here by the establishment of the Fifth Republic in which the President and Parliament can easily fight each other when the latter does not have a majority to support the policy of the former.”
However, she highlights how Italy has managed pensions since the sovereign debt crisis in the early 2010s, raising the age by three months every two years, except in some special years when the increase is stopped.
Debono argues that France could follow this example, but highlights that Paris needs more than pension reform to get close to the EU’s 3% target. “France needs massive spending cuts and/or tax increases.”
Italy a model of reform?
For years after the Eurozone debt crisis, Italy was seen as a potential problem child that could lead to the next financial disaster in Europe. In 2018 and 2019, the combination of perennial political instability and dizzying debt levels was a dangerous cocktail now familiar to French ears.
At the time, forces close to the political extremes, such as the populist Five Star Movement (M5S) and Lega, openly flirted with the idea of taking Italy out of the euro or the EU as a whole.
In the end, it was Meloni and his Brothers of Italy party who consolidated power and remains in office through October 2022. Meloni’s government is being praised for its fiscal discipline, leading many to wonder how he has turned around the country’s image for fiscal management.
In France too, a large force of the right wing has been trying to come to power for years. Yet Debono says that if National Rally ultimately comes to power, there is no guarantee they will observe fiscal discipline.
“The RNs are going to cut taxes/spending as per their programme, but they are most likely to cut taxes and it is very difficult for them to cut spending,” he said.
Edited by: Uwe Hessler