At the end of last week, the feared first rating downgrade of the creditworthiness of France’s public debt arrived. Fitch Ratings moved the country’s rating from AA- to A+, with a outlook stable. This occurred for three main reasons. First, France has a fiscal deficit that isalmost double the EU’s mandated 3% (it is 5.8%), and for this reason France is in an excessive deficit procedure with the EU Commission. Second, France has high and rising debt, which has grown from 59% in 2000 to 113% in 2025, with a jump from 98% since 2019 (partly as a result of Covid). Given the increasing commitments for military expenditure, the likelihood of this debt-to-GDP ratio falling in coming years is limited.
Third, political instability. In an intrinsically bipolar system (built around the two-rounds voting mechanism, which is meant to force people’s choice – in one direction or its opposite in the second round) the centrist experiment launched by Macron in 2017 hadcollapsed in 2022, when his party lost the majority in parliament. He has since been forced to build unstable coalitions with figures from the centre, the left and the right of the political spectrum.
The two semi-technocratic governments Macron has built over the last couple of years, led by the Républicain Michel Barnier and liberal François Bayrou, have collapsed in parliament, as they were not able to gather enough consensus to approve restrictive budget laws. According to Fitch, the phase of political instability started with the resignation of Bayrou on September 9th, after the no-confidence vote lost in parliament the day before, makes the approval of restrictive fiscal measures even less likely.
Instead of listening to party leaders in parliament in search of a possible coalition to support a new government chosen by the parties, Macron once again chose a loyalist, Sébastien Lecornu, the former defence minister. But the likelihood of forming a coalition that could vote through the next budget law is very slim, and so Macron may be forced to dissolve parliament once again. But the result of new elections may be as inconclusive as the previous two, with three blocks of similar size unwilling to compromise and coalesce amongstthemselves.
The glaring paradox facing Macron can be summarised by the phrase “damned if he does, damned if he doesn’t”, referring to reform and fiscal consolidation. Given the precarious fiscal position, France needs a serious and prolonged period of fiscal consolidation and reform. But this will make the PM, whoever he/she may be, very unpopular, and the president even more unpopular, in turn favouring the rise of extreme parties such as La France Insoumise of Jean Luc Mélanchon and Le Rassémblement National (RN) of Jordan Bardella and Marine Le Pen.
But if France’s President and PM do not make those reforms and carry out fiscal consolidation, the situation will spiral out of control, requiring even more draconian measures, sending France into a vicious circle of financial turmoil and political instability. France is new to this situation, having been considered a close substitute of Germany for many years. But countries like Italy have a long experience of these difficulties: last time the Monti government in 2011 was facing exactly the same dilemma, at a time in which the ECB didn’t even have all the necessary instruments to stop the crisis (which only arrived in July 2012). Currently, the spread of Italian and French debt versus German yields is virtually the same, even if Italy has a much larger public debt.
Additionally, if Macron dissolves parliament, it may end up with a cohabitation with the extreme parties, such as Le Pen’s RN, and this may pave the way to the party’s victory in the presidential election in April 2027. Another possibility is that Macron may be forced to resign ahead of the end of his term, something he has always resolutely excluded.
Already years ago, in July 2024, we wrote an article titled “Raising the red flag for a possible victory by Le Pen in 2027”, where we discussed the implications for France and Europe of a victory by the RN, potentially led by Bardella if Le Pen is forbidden from running. It seems that this red flag needs to be waived once again.
