Political fragmentation, market jitters and Europe’s limits collide as Paris tries to avert a full-blown confidence shock

By Natacha Valla — Dean, Sciences Po School of Management and Impact

For decades, investors and policymakers treated France as a systemic constant in Europe—a country whose economic weight and institutional gravitas made it effectively ‘too big to fail.’ That assumption is being stress‑tested in real time. The political crisis unleashed by last year’s snap elections has hardened into a structural stalemate: a hung National Assembly, revolving‑door prime ministers, and now a new cabinet tasked with steering a 2026 budget through a chamber that has little appetite for compromise. The question is no longer whether Paris can pass a budget on time; it is whether France can still anchor the euro area’s political economy when its own domestic consensus is fragmented.

Prime Minister Sébastien Lecornu’s government—announced over the weekend—keeps a technocratic core at Finance and brings in figures meant to court the center‑right and parts of the left. The declared objective is pragmatic: avoid using constitutional shortcuts and secure an approved budget that nudges the deficit lower without triggering a social backlash. That is a narrow path. France’s 2024 public deficit came in at about 5.8% of GDP and debt is on track to climb above 115% in 2026. With growth soft, the arithmetic of consolidation is unforgiving: every tenth of a percentage point of interest rates, or growth that disappoints, compounds the effort required.

Markets are not in panic, but they are no longer indifferent. In recent days, the spread between France’s 10‑year OATs and German Bunds has hovered around multi‑year highs, and bank shares have swung on cabinet news and whispers of censure motions. The repricing is subtle but important: France is being evaluated on political will as much as on solvency. That shift raises the cost of hesitation.

Why has it come to this? First, years of incremental reforms left unresolved tensions over how to finance the social model—from pensions to health care—while honoring environmental and security commitments. Second, the electoral map now yields competing mandates: a strong far right, a mobilized left, a diminished presidential center, and an electorate wary of austerity. Third, Europe’s new fiscal framework and France’s placement under the Excessive Deficit Procedure limit room for maneuver. Absent a credible multi‑year plan validated by a broad parliamentary base, any budget becomes a rolling vote of confidence.

The Lecornu blueprint gestures toward a middle way: a reduced deficit target for 2026—somewhere around the high‑4s—financed by a blend of careful spending restraint and selective revenue measures, potentially including a sharper focus on very high incomes and rents. The politics are treacherous. The left wants more redistribution and investment; the center‑right demands structural savings and labor‑market incentives; the far right prefers tax cuts and border‑first spending priorities. Each can probably block the other; none can govern alone.

In that context, three scenarios dominate the next quarter: (1) a minimalist budget passes after bruising negotiations, buying time but not certainty; (2) a confidence vote topples the government, triggering yet another reshuffle and heightening market nerves; or (3) a cross‑party pact on a narrow fiscal corridor—spending growth caps, a staged consolidation path and a targeted revenue package—emerges under duress. The third option is hardest politically but best for credibility. It would not be a grand coalition so much as a ‘limited liability’ agreement: enough discipline to satisfy Brussels and calm investors, enough flexibility to keep society onside.

Europe, too, faces a test of doctrine. The European Central Bank’s emergency tools were designed for liquidity panics in countries that are fundamentally solvent and compliant with EU rules. France clearly meets the first condition; it may struggle with the second if political gridlock stalls the fiscal path. That is why the discussion is shifting from crisis firefighting to pre‑emptive safeguards—for example, a rule‑based liquidity insurance housed at the ESM that can be activated automatically for countries that commit to a transparent consolidation track. Such a tool would reduce stigma and anchor expectations without inviting moral hazard.

Even with institutional backstops, the heavy lifting must happen in Paris. A credible French plan should rest on four pillars. First, expenditure governance: a binding multi‑year envelope that protects priority investment (education, green transition, defense) while demanding measurable efficiencies in administration and health‑care procurement. Second, tax neutrality with fairness: close loopholes and broaden bases before raising rates; if new revenues are unavoidable, focus on windfall rents and pollution, paired with relief for low‑wage work. Third, growth levers: accelerate permitting and grid upgrades to unlock private green capital, expand apprenticeships, and make the innovation tax credit simpler and longer‑dated. Fourth, a debt‑management strategy that lengthens maturity, uses buybacks opportunistically, and improves transparency on contingent liabilities—especially those tied to local authorities and state‑owned enterprises.

None of this absolves Europe of responsibility. A fragmented France would radiate instability across euro‑area markets and institutions. Conversely, a France that recommits to a pragmatic center—one capable of bargaining in good faith with both left and right—would give Brussels cover to be flexible within the rules. The key is reciprocity: credible French consolidation and reform met by a European willingness to sequence the adjustment so that it does not suffocate growth.

The deeper risk is political fatigue. Voters perceive technocratic bargaining as remote from daily life. That perception is dangerous. Fiscal policy is ultimately about intergenerational fairness: which services we protect, which investments we prioritize, and how we share the burden. The longer decisions are deferred, the harsher they become. France is not broke; it is blocked. Breaking the stalemate requires leaders to accept partial victories and incremental, verifiable progress.

Is France ‘too big to fail’? In a narrow sense, yes: the euro cannot afford a disorderly French episode. But ‘too big to fail’ is not a strategy. It is an invitation to complacency. The right lesson is the opposite: build buffers before they are needed, forge coalitions before they are fashionable, and treat credibility as a public good that takes years to accumulate and can be lost in weeks.

If the coming budget is to mark a turning point, it must be honest about trade‑offs and generous in transparency. France can still lead by example. It should start now—not because markets demand it, but because the social model we wish to preserve depends on it.