French Political Turmoil Amidst Budgetary Concerns
A deepening rift is emerging within the Les Republicains (LR) party in france, as President Eric Ciotti, who recently allied with Marine Le Pen‘s Rassemblement national (RN), is attempting to forge a lasting right-wing alliance. Ciotti has proposed a meeting with his successor, Bruno Retailleau, to “lay the foundations for a reversal of the alliance” with the RN. He accused LR deputies of being ”hostages of the Socialist Party” for supporting the government, echoing similar sentiments expressed by Retailleau who labelled the Lecornu government as “hostage to the socialists” following the suspension of pension reform. Ciotti emphasized the need to “extinguish macronism and repel the left,” aligning himself with Retailleau,who is facing opposition from other party members,including Laurent wauquiez,who opted against censuring the government.
This internal political struggle unfolds against a backdrop of significant budgetary challenges. The recently published state Budget requires France to borrow 310 billion euros in 2026 to cover the public deficit and refinance existing debt.This represents approximately 10.1% of the country’s GDP, a figure consistent with 2025 and lower than the 11.2% peak reached during the 2020 Covid crisis. While the budget debate has yet to begin,France has received a surprising degree of stability in financial markets.
Despite a public debt-to-GDP ratio nearing 115% and a deficit exceeding 5%, the International Monetary Fund (IMF) believes France’s financial situation is not currently impacting the broader European financial system. Tobias Adrian, head of the IMF’s Financial Markets department, noted the current situation differs considerably from the 2014 European debt crisis, which heavily impacted Greece, Italy, and Portugal.
while the spread – the difference in yield between French and German ten-year bonds (germany being the EU benchmark) – has increased since 2022, reaching 0.89 percentage points in early October, Adrian characterized it as “quite contained.” He attributed the increase to political uncertainties but emphasized a “limited impact on the price of French bonds” and noted no similar issues in other European countries, despite rising interest rates across the Eurozone.
Recent market activity suggests easing tensions. On Tuesday, interest rates on french debt decreased; the 10-year rate fell to 3.41% from 3.47% the previous day, while the German equivalent dropped to 2.61% from 2.64%. Consequently, the spread narrowed to 0.80 points, even reaching 0.79 points following the Prime Minister’s speech – the lowest level since September 16th. This represents a decrease from the 0.85 point spread observed after Sébastien Lecornu’s resignation on october 6th.
