Will France's budget strain the EU?

France’s political landscape has entered a new phase of uncertainty following the abrupt resignation of Prime Minister Sébastien Lecornu, the third in less than a year. Lecornu thus becomes the shortest-serving Prime Minister in the history of the Fifth Republic. His departure underscores the growing difficulty of governing a country grappling with entrenched parliamentary divisions, persistent social unrest, and an increasingly heavy debt burden.

Lecornu faced a fragmented legislature and an economy under strain, with France’s fiscal deficit among the highest in the European Union. Like his predecessors, he was tasked with the near-impossible: passing a budget capable of restoring fiscal credibility. Lecornu’s brief stint has only reinforced the sense of institutional paralysis.

With Sébastien Lecornu’s resignation, France’s political stalemate has intensified. His brief tenure was marked by mounting pressure to pass a budget amid widespread opposition and social unrest. Successive governments have struggled to reconcile opposing demands: balancing fiscal discipline with political feasibility. 

This impasse is eroding business confidence and deterring investment, both domestically and across the European Union (EU). As the bloc’s second-largest economy, France’s instability risks weakening the EU collective position within a fragile global context. A sluggish French economy has a negative impact on import demand and fuels calls for protectionism, undermining EU efforts to secure new trade agreements.

“This situation is concerning not only for France but for the wider EU,” says Christian Bürger, Senior Editor at Atradius. Bürger adds. “In a global environment characterised by trade tensions and geopolitical polarisation, policy deadlock and division in the bloc’s second-largest economy paints an unhelpful picture."

Businesses and households in wait-and-see mode amid political instability

France’s political instability continues to weigh on its economic outlook. While the fall of François Bayrou’s government had already been absorbed by markets, the abrupt resignation of Sébastien Lecornu has renewed concerns about policy continuity and fiscal direction.

At present, Atradius maintains its forecast of 0.6% GDP growth for 2025, followed by 0.7% in 2026. However, business investment is expected to decline in the second half of 2025, alongside a reduction in domestic demand.

“Business activity is slowing down. Companies facing an uncertain environment are adopting a wait-and-see attitude to investment and hiring,” says Christophe Cherry, Atradius Regional Director for France, Belgium, and Luxembourg. “Both businesses and households are waiting to see what direction the new government will take.”

“The most vulnerable sectors are particularly automotive and construction.” says Cherry. “France remains the leading agricultural power in the EU but rising global competition, trade tensions and geopolitical disruptions are putting pressure on French producers and agri-businesses.”

Despite the turbulent context, companies are showing resilience and organising to bounce back. According to our latest Insolvency Outlook, we see a gradual adjustment toward pre-Covid levels in the second half of 2025.

Public debt will remain high for longer but not dead in the water

François Bayrou’s proposal to cut EUR 44 billion in public spending was met with fierce resistance. His government collapsed after losing a vote of confidence called to secure support for the plan. Lecornu’s departure marked a halt in the attempt at fiscal consolidation before 2027.

“The government debt will remain higher for longer,” says John Lorié, Chief Economist at Atradius. “Ratings agency Fitch recently downgraded French debt, which will make it more expensive for the State to borrow money. When the government is finally stable enough to properly tackle the fiscal deficit it will need to take more drastic measures to bring debt down. This is the price France will have to pay for delaying inevitable measures.”

We expect full-year fiscal deficit of around 5.4% of GDP in 2025 and of 5.7% of GDP next year, over twice the figure predicted for neighbouring Germany. Figures released last week put public debt at EUR 3.4 trillion, or nearly 114% of GDP. The level of debt leaves France limited scope to address economic shocks and increases the possibility of wider financial instability in the eurozone.

Unlikely risk of contagion

Very high public debt is a significant risk, both in France and further afield with potential consequences for financial institutions and the wider eurozone economy. The resignation of Lecornu led to a reassessment by investors of France’s ability to restore fiscal discipline. The widening spread between French and German government bonds reflects growing market unease over France’s political situation and its implications for long-term debt sustainability.

France now pays a higher yield on its 10-year bond than either Portugal, Spain or Greece. Growing EU debt could increase borrowing costs across the bloc and weaken the euro. Given France’s close financial and trade ties with the eurozone, some observers acknowledge a theoretical risk of contagion, though this is widely considered unlikely under current conditions.

“The risk of contagion exists but is unlikely to materialise at the moment,” says Lorié. “Measures have been introduced by the European Central Bank to avoid a crisis similar to the sovereign debt crisis of 2008-12. This will ultimately force France to bring its public finances in order. Moreover, banks in the eurozone are better capitalised, and households and businesses hold less debt than they did in 2008. But, while an all-out fiscal crisis is not likely, worries over France’s public finances put upward pressure on borrowing costs undermining the already weak growth in the eurozone.”

France still retains structural strengths that could help cushion the impact of the current situation. Inflation remains low, the country is less exposed than others to US tariffs, and unemployment is below historical averages. Nonetheless, its stretched public finances are increasingly becoming a worry. With political gridlock persisting, it remains unclear when or how they will be addressed. 

To explore how to strengthen your own credit risk strategy, get in touch with us and see how we can help you stay ahead.