France’s political crisis is fuelling concern among economists who caution that sustained institutional paralysis could undermine growth and complicate efforts to stabilise public finances.
The sudden resignation of Prime Minister Sébastien Lecornu, less than a month into the role, has left the government without a working majority at a time of rising fiscal pressure.
With no roadmap for resolving the deadlock and President Emmanuel Macron facing mounting calls for fresh elections, analysts warn that continued uncertainty could jeopardise compliance with EU fiscal rules as Brussels sharpens its oversight.
France’s bond market wasted no time reacting to Lecornu’s resignation.
At the time of writing, yields on 10-year French government bonds (OATs) are now trading around 86 basis points above their German equivalents — a spread last seen during the collapse of the Barnier government in late 2024.
That puts current levels also on par with those seen in July 2012, during the final stages of the eurozone debt crisis.
According to Goldman Sachs, France has experienced the largest rise in country risk among major markets since elections last year.
In a note on Tuesday, Goldman Sachs said it expects the uncertainty to result in slightly weaker growth and higher fiscal deficits.
Senior economist Simon Freycenet estimated that the 2026 deficit could rise by 0.1 percentage point, while GDP growth may slow by around 0.2 percentage point.
Goldman Sachs also noted that the bond market has already priced in much of the political risk.
If the current situation persists, it expects the spread between French and German 10-year bonds to narrow toward its end-2025 forecast of 70 basis points. However, the bank cautioned that persistent uncertainty means the risks remain tilted to the upside.
“The French PM’s resignation signals heightened budget risks,” said ING economist Charlotte de Montpellier.
The expert indicated that France is at risk of entering the new year without an approved 2026 budget. In that case, the government would operate under an automatic extension of the 2025 budget, limiting both new spending and reform initiatives.
De Montpellier said this political paralysis comes at a particularly sensitive moment, as France is already under an excessive-deficit procedure by the European Commission.
“France is currently subject to an excessive deficit procedure…It is likely that the Commission will take a tougher stance with France and insist on the need to restore order to public finances,” de Montpellier said.
The lack of progress on fiscal consolidation, he explained, could leave the deficit hovering near 5% of GDP in 2026, with public debt climbing above 116 per cent of GDP.
According to ING estimates, France’s economic growth is expected to expand by only 0.8% next year, putting the country well below the eurozone average.
Looking ahead, analysts see two main scenarios unfolding, neither of which offers an easy fix.
According to BBVA, President Emmanuel Macron could either appoint a new prime minister in a renewed attempt to form a stable government or dissolve the National Assembly and call snap elections.
Both paths carry risks: a new appointment may struggle to secure a parliamentary majority, while elections could deepen political fragmentation and delay key fiscal decisions.
“We can see spreads experiencing more widening pressure as uncertainty lingers on the prospect of new elections, but also as the market is looking at increasing tail risks such as an early end to Macron’s presidency,” said ING’s analyst Benjamin Schroeder.
If speculation over an early end to Macron’s presidency gathers momentum, the 10-year OAT-Bund spread could push well beyond the 90 basis point threshold, according to ING.
Markets are also beginning to focus on the European Central Bank — and whether it may be compelled to step in to contain growing risks in France’s bond market and prevent spillovers across the eurozone.
Central to the debate is the ECB’s Transmission Protection Instrument (TPI), a 2022 tool that allows Frankfurt to buy bonds from countries facing unjustified market stress.
Although France may fall short of the strict fiscal and reform criteria needed for the activation of the TPI, the ECB still has some room for manoeuvre.
“The TPI has strict conditionality on paper, but the ECB still has discretion in deploying this tool,” noted ING’s Benjamin Schroeder.
According to ING, If the French bond market becomes too volatile and threatens the ECB’s control over eurozone-wide financial conditions, it may be forced to act, even if France doesn’t strictly meet the fiscal criteria for support.
“France is just too big and relevant to do nothing,” Schroeder added.
The euro has already shown signs of weakness in response to France’s political turmoil, but analysts see the impact as contained, at least for now.
“The political saga in France has taken a fresh twist,” said Michał Jóźwiak, forex market analyst at Ebury.
He pointed out that the euro dropped nearly 1% against the dollar, despite the backdrop of a US government shutdown.
BBVA indicated that the real risk lies in the potential for snap elections, which the bank sees as “the most harmful scenario for the euro in the short to medium term”.
“Political and fiscal developments in France (particularly the prospect of snap elections) could dampen investor appetite for the currency,” said ING forex analyst Francesco Pesole, noting that EUR/USD already lacks a strong narrative to push towards the 1.20 level in the short term.
Still, he noted that expectations for two Federal Reserve rate cuts by year-end, combined with favourable fourth-quarter seasonality, continue to support the view that EUR/USD could reach 1.20, even after accounting for political uncertainty in France.
France’s political gridlock is fuelling economic uncertainty, with analysts warning it could stall reforms and keep deficits elevated.
As pressure builds, so do the risks to market stability and compliance with EU fiscal rules.
For now, the situation remains contained, and the ECB is staying on the sidelines — but with France too large and systemically important to ignore, it may not remain there for long if the crisis deepens.
