France: Socialists 'grab hold' of Sébastien Lecornu

French Prime Minister Sébastien Lecornu has conceded to the Socialists' most important demand, postponing the review of the French retirement age until after the next presidential elections—which, if all goes according to schedule, will only be in the second quarter of 2027. The result was as expected: the Socialists will not only not advance their own motion of censure, but are also willing to sit down at the negotiating table for the 2026 State Budget. Lecornu sighed with relief and said that the minimum conditions are in place for the new government to launch the budget and have some hope that the two motions of censure it will face—one from the far left and the other from the far right—will not be successful.

"The Socialist Party group will not vote on the motion of censure and will not present a motion of censure," announced Socialist MP Laurent Baumel. The Socialists' decision eliminates the risk of censure—or at least mitigates it—and therefore the risk of dissolution of the National Assembly, allowing a parliamentary debate on the 2026 budget to take place. "This does not mean that we are committed to voting on the budget. It does not mean that we will not request other concessions, other commitments as part of the discussion," added Laurent Baumel. Socialist group chairman Boris Vallaud also assured that the Socialists are ready to "take risks" in the parliamentary debate, thus paving the way for the government to remain in office.

But nothing is guaranteed. In fact, former Les Republicains (LR) president Eric Ciotti, who allied with Marine Le Pen, proposed to his successor, Bruno Retailleau, "a meeting to lay the groundwork for a reversal of the right-wing alliance with the Rassemblement National (RN)." "Hostages of the Socialist Party, LR MPs are signing a pact with the devil," Ciotti wrote, using the same language as Retailleau, who had just accused Lecornu's government of being "hostage to the Socialists" following the decision to suspend pension reform. "We must extinguish Macronism and repel the left," Eric Ciotti continued, thus joining Bruno Retailleau, who finds himself at odds with his party's MPs, led by Laurent Wauquiez, who chose not to censure the government.

Meanwhile, the various measures in the State Budget—which includes cuts that don't go as far as the €44 billion targeted by the previous government of François Bayrou—require France to tap the markets for €310 billion in 2026 to finance the public deficit and refinance maturing debts, according to the program published by the French Treasury Agency (AFT), responsible for managing the State's debt. This amount should represent, relative to the wealth produced by the country throughout the year, approximately 10.1% of GDP in 2026, a proportion unchanged from 2025 and still below the peak of 11.2% reached in 2020, the year of the Covid crisis.

But, even though the debate on the Budget has not yet begun, France has already received important 'help': despite a public debt/GDP ratio close to 115% and a public deficit that still exceeds 5%, the French financial situation and the government's difficulty in approving a budget for the second consecutive year do not weigh on the European financial system, assessed Tobias Adrian, head of the Financial Markets department at the International Monetary Fund (IMF), during the presentation of the report on global financial stability.

"The current situation is very different from that seen in 2014," during the European debt crisis, which particularly affected Greece, but also other southern countries, especially Italy and Portugal, explained Adrian, quoted by the French press. "We are seeing an increase in the spread [the difference in rates on French ten-year bonds compared to those of Germany, considered the benchmark within the European Union] to some extent, but this remains quite contained," he added.

This gap has been widening since 2022 and reached 0.89 percentage points in early October for ten-year bonds. "There is a revaluation to some extent, due to political uncertainty, but at the same time, there is a limited impact on the price of French bonds," the analyst said. Furthermore, the risks of contamination for the eurozone are limited, he assured: "We are not seeing anything similar in other European countries," he said, giving little significance to the fact that interest rates in most eurozone countries rose over the past week.

It's worth noting that interest rates on French debt fell in the markets this Tuesday. The 10-year interest rate, a benchmark for international investors, was at 3.41% mid-afternoon, down from 3.47% at Monday's close. The German equivalent reached 2.61%, down from 2.64% at Monday's close. The spread narrowed to 0.80 points and even reached 0.79 points after the prime minister's speech, for the first time since September 16th, a sign of a easing of tensions over French debt. For comparison, the spread rose to 0.85 points when Sébastien Lecornu resigned on Monday, October 6th.