Macro
France’s finances face fresh scrutiny as political risk rises
Weak public finances and difficult budget negotiations are likely to keep pressure on French assets ahead of the 2027 presidential elections. Investors may continue to demand a higher risk premium, although the country’s long-term economic strengths provide some support.
Key takeaways
- France arguably needs a combination of realistic spending cuts, productivity-enhancing reforms and stronger growth to stabilise its debt, but political gridlock and the 2027 elections make progress difficult.
- For French government bonds, the main risks are debt affordability and confidence in the public finances – not solvency or near-term funding. Future spread moves will depend on incremental fiscal and political developments.
- In credit, investors are likely to keep demanding a French premium, especially for subordinated financials, quasi-sovereigns and domestically exposed issuers, while international high-quality names should remain more resilient.
- We are broadly neutral on French equities but cautious on utilities, telecommunications and financials with material sovereign or domestic exposure.
We expect French assets to carry a structurally higher risk premium heading into elections in 2027. Budget negotiations and upcoming sovereign rating reviews are likely to keep volatility elevated, as investors assess whether France can present a credible fiscal path ahead of the election cycle.
France has long-term strengths, including favourable demographics, strong technology and defence sectors, and globally competitive industries. But it needs realistic spending plans and reforms to boost productivity and stabilise its debt.
Economics: no easy solutions
Christian Schulz
Chief Economist
Fiscal and political concerns have weighed on the outlook for France’s economy and financial assets for years. Since 2002, France has exceeded the Maastricht deficit threshold in all but three years. Its public debt ratio has roughly doubled since 1999 level and is now almost twice the Maastricht benchmark, approaching 120% of GDP.1
President Emmanuel Macron’s first term (2017-2022) brought promising structural reforms and economic outperformance. But political gridlock in his second term, particularly since the 2024 snap election, has partially reversed that progress and put meaningful fiscal consolidation beyond reach. More recently, France has shifted from growth leader to growth laggard. The economy failed to grow in the first two quarters of this year, with data pointing to persistent weaknesses. While external headwinds, including US tariffs and higher energy prices, have played a role, other European economies have proved far more resilient.
Without demand stimulus or the option of restoring competitiveness through currency depreciation, France is undergoing internal devaluation.
Unemployment has risen (see Exhibit 1) against a broader European trend of labour market resilience, weighing on wage growth and employment costs. Household purchasing power and consumption have come under pressure, but (net) exports have become a growth driver for France.
The headwinds are likely to intensify. France has high levels of both public and private debt (see Exhibit 2). This makes it vulnerable to higher borrowing costs, whether caused by European Central Bank (ECB) policy or rising global bond yields. Nominal growth will be insufficient to offset higher borrowing costs as real growth and inflation are likely to be below the euro zone average in 2027. The 2027 presidential elections in April and May 2027 will make it harder for the government to support the economy and could increase the political risk premium on French government debt. Risks could crystallise before then around upcoming negotiations for the 2027 budget.
In this environment, aggressive fiscal tightening could backfire. But vague promises on debt reduction may not satisfy increasingly vigilant bond investors. The next government may soon face widening sovereign spreads, pushing up borrowing costs further. In such a scenario, European partners and the ECB could help. But that help would likely require real commitment to stability, through fiscal discipline, reforms or both. Getting that support won’t be easy politically.
Fiscal consolidation must come from spending and entitlement cuts. But with borrowing costs above 4%, the combination of weak growth and a deficit near 4% of GDP means that the required adjustment – about 6% of GDP – is too big for cuts alone. Reforms and productivity gains are key to keeping growth ahead of interest rates.
Still, France has real strengths. Its demographics beat most European peers. It is less trade-dependent than Germany or Italy, has strong technology firms, including in artificial intelligence, and a large defence industry. These strengths give future leaders considerable leverage with European partners and should help reassure investors about France’s ability to service its debt long term.
Exhibit 1: France’s unemployment rate has risen relative to the euro area trend (%)
Sources: Eurostat and AllianzGI E&S. Data as at 31 August 2026
Exhibit 2: France has high levels of public and private debt relative to other major economies
Sources: BIS and AllianzGI E&S. Data as at 31 December 2025.
Rates: waiting for reassurance
Matthieu de Clermont CIO Insurance & Regulatory Strategies
For fixed income investors, the main concern is debt affordability and fiscal credibility rather than France’s ability to repay. France continues to benefit from deep capital markets, a diversified investor base and a debt structure that limits near-term refinancing risk. The challenge is that persistent deficits and a higher interest rate environment gradually reduce fiscal flexibility over time. As a result, investors are increasingly demanding compensation not for default risk, but for uncertainty surrounding the future fiscal trajectory.
Current market valuations already reflect a significant degree of fiscal and political concern. But a further increase in the yield premium on French government bonds would likely require evidence that France’s fiscal credibility is deteriorating beyond current expectations. That might be through weaker growth, larger deficits or a more difficult path towards fiscal consolidation as the 2027 budget debate unfolds.
From a market perspective, positioning has also become an important factor. Investors have been cautious towards government bonds – Obligations assimilables du Trésor (OATs) – for a while and that “underweight” positioning has amplified the repricing of recent quarters.
The cautious positioning also means that price swings in French bond spreads will likely be driven more by day-today news than by the underlying fiscal situation itself. A near-term catalyst is Moody’s review on 23 October 2026, which could add to spread volatility and shape sentiment towards French risk assets.
Given this, the key question is now how much extra return investors will demand to keep lending to a government with weaker finances and more political uncertainty. The most likely result is that borrowing costs stay structurally higher and spreads stay more volatile, rather than France struggling to find buyers for its debt.
Credit: French credit premium
Vincent Marioni CIO Credit
Over the summer, the credit market started pushing French borrowers’ spreads wider again, ahead of upcoming political events. A familiar pattern is playing out: wider spreads on subordinated bank and insurance debt, followed by quasi-public issuers, and then French corporates that mainly do business domestically.
At this stage, the risk premium is within the range of 5 to 50 basis points compared to similar non-French securities. That said, the strongest issuers (rated A and above) with highly international businesses trade well inside the sovereign’s spread, something that has been happening regularly of late. The pricing on most securities reflects the extra premium investors are asking for, rather than a lack of demand.
The imbalances in French public finances mean the outlook for credit spreads will hinge on the evolution of the polls between now and the 2027 elections. But it will also depend on the political instability that may arise during this autumn’s budget negotiations.
The elections will need a positive outcome, with a majority government backed by a credible programme. Otherwise, the risk premium is likely to remain a structural issue, as has long been the case for Italian issuers, for example.
Equities: caution to persist
Head of European Equities
Product Specialist
During the budget negotiations, we are likely to witness the same kind of fiscal policy uncertainty seen in previous years. And in the run-up to the elections, opinion polls could add to market volatility in the coming months.
From an equity perspective, this risk premium looks like it is here to stay. We currently have a broadly neutral view on France. We remain cautious on companies with significant exposure to French sovereign debt, especially in the utilities and telecommunications sectors. Financials could also prove sensitive to this environment, and we continue to monitor developments closely.
1 Source: European Commission, Directorate-General for Economic and Financial Affairs, Economic Forecast for France, May 2026
