Insight Investment

France faces a precarious and unpredictable political outlook

• France’s political landscape is highly fragmented, with a divided parliament and precarious governments fuelling legislative gridlock and reliance on legal mechanisms to pass budgets, resulting in only temporary stability.
• The 2027 presidential election is expected to be highly unpredictable due to the splintered political field. The far-right National Rally (RN) are strongly positioned to reach the run-off, while polling suggests most run-off scenarios are extremely close.
• The election outcome will significantly impact France’s fiscal and political stability; a moderate victory may aid fiscal reform, while an RN win without a stable majority could worsen gridlock and increase investor uncertainty.

The French fiscal outlook could deteriorate further

• France faces persistent fiscal challenges, with budget deficits stretching back 50 years, rising debt levels, and expenditure – particularly on pensions and social protection – consistently outpacing revenues, making meaningful fiscal consolidation elusive.
• Recent attempts at pension reform have stalled amid political instability, with the government suspending planned changes until after the 2027 election. Defence spending is set to rise but remains below NATO targets and is dependent on parliamentary approval.
• All major credit rating agencies have taken negative actions on France’s sovereign rating, citing deteriorating fiscal conditions and political uncertainty. There is a meaningful risk of further downgrades, and potential for market instability similar to Italy’s experience in the early 2010s. 

Implications for investors and alternatives to French assets

• The ongoing political and fiscal instability is a clear risk for French assets, with government bond and credit markets potentially vulnerable to further credit rating downgrades and deteriorating market sentiment. This could see French assets underperform eurozone peers, while contagion remains a concern for the wider region.
• Investors seeking alternatives to French bonds may consider German bunds, semi-core bonds (Netherlands), peripheral bonds (Italy, Spain), and selected European supranational issuers, each offering varying levels of yield, liquidity and risk.
• While a French debt default or euro exit is highly unlikely, long-term buy-and-hold investors may remain comfortable; however, active investors may prefer diversifying away from France until political and fiscal risks subside.