A Fractured France Forces Macron into Fiscal Tightrope Act

France’s political instability has intensified as Prime Minister François Bayrou’s government fell on a no-confidence vote, deepening concerns over fiscal governance and economic policy. The vote, held on Monday, saw 364 lawmakers reject the government’s confidence, with only 194 supporting it. The defeat stems from Bayrou’s controversial 2026 budget proposal, which sought €44 billion in spending cuts to address France’s growing public debt. However, the plan failed to secure broad political support, and internal divisions within centrist and conservative factions exacerbated the government’s vulnerability. With the resignation of Bayrou now formalized, President Emmanuel Macron faces the challenge of appointing a new prime minister who can navigate a fractured parliament and avert further political deadlock [2].

Macron has ruled out dissolving parliament in the immediate term and is expected to name a new prime minister within days. Some centrist lawmakers have suggested appointing a “negotiator” to broker consensus on key fiscal measures before a new government is formed. However, this approach could delay the budget process, raising the risk of economic stagnation and public discontent, particularly with protests scheduled for early October. The government’s collapse highlights the broader fiscal challenges facing France, where public spending is projected to rise by €51.1 billion next year, pushing the deficit to 6.1% of GDP. Without structural reforms, public debt is expected to climb from 113% of GDP in 2024 to 125.3% in 2029, driven largely by rising healthcare and social protection costs as the population ages [2].

The political uncertainty has already had a measurable impact on economic confidence. While specific sentiment data post-25 August is not yet available, analysts expect a decline in business and consumer confidence, which may lead to delayed investment and hiring decisions. The real estate and construction sectors, which are sensitive to financing costs, could be particularly affected as market rates rise. Economic growth, already below potential at 0.6% this year, is likely to stagnate in the fourth quarter, compounding the challenges for policymakers [2].

The fallout is also evident in the bond markets. French government bond (OAT) yields are unlikely to tighten significantly, as uncertainty over the budget process continues to weigh on investor sentiment. The 10-year OAT-Bund spread remains tighter than the peak seen in November 2024 but remains elevated relative to historical averages. The possibility of new parliamentary elections adds another layer of complexity, prolonging the period of fiscal uncertainty and limiting the potential for monetary easing by the European Central Bank. However, analysts suggest that as long as Macron remains in power—until the 2027 presidential elections—OAT spreads are unlikely to widen sharply, and a broader market shock is considered improbable [2].

Against this backdrop, the EUR/CAD exchange rate has shown signs of bearish pressure, with 1 EUR equating to 1.6236 CAD as of the latest available data. Analysts attribute this trend to the combination of France’s political instability and Canada’s relative economic resilience. Canada’s stable governance and stronger fiscal outlook provide a contrast to the uncertainty in Paris, making the Canadian dollar an attractive option for risk-averse investors. The continued divergence in political and economic trajectories between the two countries is expected to reinforce the bearish outlook for the EUR/CAD pair in the near term [1].

Source: [1] 1 EUR to CAD - Euros to Canadian Dollars Exchange Rate (https://www.xe.com/currencyconverter/convert/?Amount=1&From=EUR&To=CAD) [2] French government falls, fiscal uncertainty deepens - ING Think (https://think.ing.com/snaps/french-government-falls-fiscal-uncertainty-deepens/)