This time last week, French Prime Minister, Sébastien Lecornu, announced his intention to step down after just 27 days in office. Lecornu had just announced his cabinet, upsetting many parties in parliament and triggering talk of a vote of no confidence – which Lecornu would likely lose. The cabinet he agreed on was essentially the same as the previous one under François Bayrou, whereas other parties were calling for change.
Despite quitting, Lecornu was immediately tasked by French President, Emmanuel Macron, to try to find some common ground with the parties, with a view to moving things forward. By Friday, it was clear some progress had been made, and Macron announced his new Prime Minister – Sébastien Lecornu. It was a case of déjà vu!
There is really no appetite for elections in France right now, which is why Macron has gone down this path. All of the parties – except for National Rally – really don’t want elections at the moment, because National Rally, led by far-right politician Marine Le Pen, would likely make significant progress.
The problem is that the French parliament (post the 2024 elections) is a hung parliament with three large blocs, none of which can agree on the path forward. That makes policymaking and government stability very difficult to achieve. Following his reappointment, Lecornu has come forward with a new cabinet and some fresh faces. However, they face the same old problems: France is running a high budget deficit and has significant national debt, and currently there is no appetite for implementing the major reforms needed to address this situation.
There is now significant pressure to roll back previous pension reforms, which were hard enough to get through in the first place. and Lecornu has a tough task keeping the government together. The administration must put forward a budget to parliament this week for it to be in place for 2026, but there’s a real question around whether France just stumbles on towards the 2027 presidential election and endures political gridlock in the meantime. There are no parliamentary elections due until 2029, but again the government looks unstable and significant policy change appears very difficult to achieve.
What does that mean in markets? French equities struggled at the start of last week, not least French banks. It is worth bearing in mind, however, that much like the UK a lot of the revenues for large French companies come from overseas. The domestic issues are largely irrelevant to these businesses, but we are still seeing a risk premium in French government bonds over German government bonds, which is likely to remain in place.
Obviously, with France being a major economy within Europe it falls very much in the ‘too big to fail’ camp, so while French government bond yields will likely be higher for a long period of time, it is a situation that investors will need to get used to. If there were to be major dramas, then ultimately intervention is an option, but we are nowhere near that right now. The French government is going to try and push through a compromise budget in the coming days, and we will see how that goes. We are not saying Lecornu will still be in power at the end of the year, but hopefully this brings a little more stability in the short term.
