Record debt and election politics raise stakes for French budget

France is bracing for a high-stakes budget battle as the country prepares for presidential elections next spring. The election frontrunners include hard-left and far-right candidates with expensive platforms, raising concerns about the government's ability to control its public finances. The current deficit is one of the highest in the euro zone, and political parties are keen to secure an advantage ahead of the April 18 and May 2 election.

Prime Minister Sebastien Lecornu's government faces a hung parliament, making it difficult to pass the 2027 budget before the election. Investors are bracing for months of turbulence, with France's bond spreads widening as financial markets become increasingly anxious about the country's fiscal situation. Credit rating agencies are expected to update their assessments in the coming weeks, with Fitch already having downgraded France's credit score to a record low.

The upcoming budget cycle has been a source of drama since the 2024 legislative elections produced no majority, leading to the ousting of two of Lecornu's predecessors over failed negotiations. With the presidential race looming, investors are scrutinizing France's ability to rein in its deficit just as the Treasury prepares to refinance huge COVID-era debts.

The government has promised big savings measures when the budget bill comes before lawmakers in early October, including the freezing of part of France's pension spending. However, the political risks involved make it challenging to implement the necessary reforms to reduce the fiscal deficit.