France avoids another crisis, markets like it, but reforms struggle

French Prime Minister Sébastien Lecorne’s decision to suspend controversial pension reforms brought welcome relief to markets on Wednesday, with the move likely to avoid further government collapse, at least for now.

But scrapping the 2023 reform, a key part of President Emmanuel Macron’s legacy that would have raised the retirement age from 62 to 64, and bailing out the beleaguered government will come at a price.

“There will be no increase in the retirement age between now and January 2028,” Lecorne told MPs in Parliament on Tuesday, as he laid out the government’s policy roadmap.

Lecorne promised not to force parliament to pass the budget and offered concessions to win support from the Socialist Party ahead of Thursday’s vote of no confidence in the government.

The center-right Republican Party also said it would not support the motion put forward by far-left and far-right blocs.

The increased likelihood of L’Ecornu’s survival has reignited hopes that France will pass a cost-cutting budget in 2026 aimed at tackling France’s deficit and debt mountain.

France’s CAC40 index rose 2.5%, its biggest single-day gain since April, as investors reacted positively to the prospect of France’s fifth prime minister in less than two years surviving ousting. EUR Against the dollar, it rose 0.2%.

The proposed repeal of pension reforms will not be cheap and would mean a step backwards in France’s much-needed and long-overdue structural reforms.

France’s retirement age of 62, and the proposed increase to 64 (requiring retirees to have at least 43 years of service), is much lower than the standard age in many other European countries. In the UK, the pension age is scheduled to rise from 66 to 67 in 2026, while in Germany it is 65 and in Italy it is 67.

But resistance to changes to age and contribution requirements persists in France, and Mr Macron’s decision to use special constitutional powers to pass pension reforms through the lower house of parliament in 2023 angered MPs and sparked widespread protests and industrial action.

His signature reforms are now on hold, with analysts saying they could become even more diluted and could impact France’s fiscal outlook.

Lecorne said canceling the unpopular pension reform is expected to cost 400 million euros ($465 million) in 2026 and 1.8 billion euros in 2027, adding that such costs “need to be offset with savings” and “cannot be done at the expense of widening the budget deficit.”

Economists at Goldman Sachs said suspending pension reform until the 2027 presidential election would have limited impact on the short-term fiscal outlook. If the suspension continues beyond that, it could derail efforts to reduce debt and deficits.

“If retirement ages and contribution periods continue to rise beyond 2027, as currently proposed, medium-term costs would also remain contained…However, the risks are likely to tilt toward a longer suspension (especially if pension reform remains contentious in the run-up to the 2027 presidential election), with a greater impact on the outlook,” they said in an emailed analysis on Wednesday.

An independent French audit firm estimates that the annual cost to public finances of permanently suspending pension reform will reach 20 billion euros (0.5% of GDP) by 2035.

“French public debt is therefore likely to increase by 3-4 percentage points of GDP over the next decade and stabilize at close to 130% of GDP,” they said. France’s debt-to-GDP ratio will be 113% in 2024.

The centrist government insists that fiscal consolidation remains its central mission, and Lecorne said on Tuesday it aims for a budget deficit of 4.7% of gross domestic product (GDP) in 2026, down from 5.5% of gross domestic product (GDP) this year.

But Mr Lecorne insisted the budget was not austerity, and stopped short of outlining a wealth tax in his policy plan, but suggested he would seek “exceptional (one-off) contributions from large fortunes” without providing further details.

Claudia Pancelli, France’s chief investment officer at UBS, said France’s fiscal position was unlikely to improve significantly even if the government were able to pass a 2026 budget.

“France’s debt-to-GDP ratio has already reached 113% in 2024, and we expect it to worsen by another 2-3 percentage points.”
Panseri said in an analysis on Wednesday that he expects the annual deficit to exceed 5% in the medium term, and that UBS expects the deficit to exceed 5% in 2026.

“Investors with global portfolios should consider reducing their exposure to long-term French government bonds and monitor developments closely, as political shocks in France could spill over into broader European markets,” he added.

Pancelli said short-term French government bonds are less affected by debt concerns and offer good yield levels with low default risk.