Nervous cheeks in Europe as France enters another political crisis

Tensions are likely to be high in Brussels this week as yet another political implosion in France leaves the country's much-needed fiscal consolidation hanging in the balance.

The euro zone's second-largest economy has repeatedly flouted the European Commission's rules on budget deficits and debt limits, and successive prime ministers who have tried to solve the problem with proposed reforms, spending cuts and tax increases have been repeatedly ousted.

The latest martyr in Paris' ongoing political deadlock – France's fifth prime minister in less than two years – is Sébastien Lecornu, who announced his resignation on Monday after just 27 days in office.

His decision to resign came after he failed to get political rivals (and even allies in the middle) to support his new government. He had not even announced 2026 spending or tax plans, although budget wrangles between the government and rival parties were the undoing of previous administrations.

Seeing that he is desperate to avoid losing another prime minister, French President Emmanuel Macron on Monday evening gave Lecornu 48 hours to devise a plan for “stability for the country” and a way through the political deadlock.

Lecornu wrote on X that he will report to the president on Wednesday evening about a possible breakthrough “so that he can draw all necessary conclusions.”

However, whether there is more time to get the other political parties on side remains to be seen, with those on both the far left and the right smelling blood, calling for Macron's resignation and new parliamentary and/or presidential elections.

Officials in Brussels are unlikely to want to meddle in political affairs at home, but the pressure is on for Paris to start some serious fiscal consolidation – and quickly.

France must close a budget deficit of 5.8% of GDP in 2024 and tackle a significant debt pile that reached 113% of GDP last year. This placed France behind only Greece and Italy in terms of the European Union's largest debt piles.

Both levels are well above EU rules that require individual members' deficits to exceed 3% of GDP, while their public debt to exceed 60% of economic output.

France has been placed under the EU's “excessive deficit procedure”, applied to member states that do not comply with the rules set out in the “Stability and Growth Pact”.

It has until 2029 to get its house in order, but there is no sign that France will be able to meet its obligations anytime soon.

CNBC has asked the European Commission for comment on the latest crisis and is awaiting a response.

“The question is how you stick to that [EU] Rules?,” Antonio Fatas, professor of economics at INSEAD, told CNBC on Tuesday.” Currently, France's deficit is clearly outside the rules and it is unclear whether France's budget will bring you within the rules in a short period of time, as the rules require. “

“Given the composition of the parliament, given the fragmentation, given the views of the far right and the far left, it means that it seems very, very difficult to reach a budget that lives by those rules,” he told CNBC's “Europe Early Edition.”

While the EU may be willing to kick the can down the road, investors may not be so willing to overlook France's lack of fiscal discipline. The country has already had a downgrade from Fitch last month, with Moodys expected to follow suit in late October.

If Lecornu's efforts fail in the coming hours, Macron will be faced with the choice of appointing a new prime minister, dissolving parliament and calling new parliamentary elections, or resigning. It is currently unclear which option Macron will choose, although the latter option of resignation is considered very unlikely.

In either scenario, economists say there is unlikely to be significant progress in reducing the country's deficit or debt pile, with growth also slowing. Moreover, the 2025 budget will likely be rolled over until next year.

“Whatever the scenarios, we don't have a good budget at the end of the year,” Hadrien Camatte, senior economist for France, Belgium and the Eurozone in Natixis, said on Tuesday.

“So in terms of fiscal consolidation at this stage, we don't see very positive scenarios, which means the deficit will probably remain near the current level of 5.4-5.5% level for this year, and probably for next year depending on the budget and macro data,” he told CNBC's “Europe Early Edition.”

Goldman Sachs also said on Tuesday that likely “budget slippage” in France had prompted the bank to increase its 2025 budget deficit to 5.5% of GDP.

“First, we continue to expect growth to be below trend… Second, we still expect to see little progress in reducing the government deficit,” Goldman Sachs economists said in a note on Tuesday, adding that “it also looks likely that France will start next year with a frozen (or at least partial) budget.”

“In any case, deep political disagreements, slower growth and higher borrowing costs are likely to prevent significant progress, and we are raising our 2026 deficit forecast by 0.1 percentage points to 5.3% of GDP,” they noted. Goldman also lowered its 2026 growth forecast for France, predicting lackluster expansion of 0.8% next year.