France: problematic debt and political disaffection

Debt, deficits and the yield spread

The difficulty of tackling the high level of government debt and deficits has accompanied political disaffection over the last two years. Ever since President Macron’s centrist Renaissance party did poorly in European elections in June 2024, successive prime ministers (there have been three – Michel Barnier, Francois Bayrou and, now, Sébastien Lecornu) have been unable to take effective action. The 10-year yield spread between France and Germany remains elevated: 60 basis points, ten times the spread in the first ten years of the euro’s existence.

The IMF sees the budget deficit, 4.9% of GDP in 2026, staying above 3% until 2031. Government debt rises steadily from 118% to 121% of GDP over that period.

Demographics and growth

On a more optimistic note, France’s demographics are not as concerning as in many G20 economies The population is expected to continue growing over the next 25 years, and not ageing too rapidly. This means that potential GDP growth is slightly higher in France (1.2% p.a. over the next 15 years) than in other large eurozone economies. GDP grew slightly below this potential rate (0.9%) in 2025 and the IMF's reference forecast made in April 2026 (which sees a relatively quick end to the Iran war) sees the same rate in both 2026 and 2027. If oil prices remain around $100/barrel, GDP growth could be hit by 0.5% or more in 2026, taking growth close to zero.

Inflation

French core inflation is around 1% but headline, all items inflation has now moved over 2.5%. Broad money growth remains weak, however, and private credit sector credit continues to decline relative to GDP. These trends suggest any inflationary pressure will be limited.

Governance and Competitiveness

France scores well on corruption perceptions (although its score and rank have dropped in the last few years) but competitiveness, innovativeness and the Heritage Foundation's freedom index all put France around the middle of the G20 ranking. One structural strength is France’s low carbon emissions, largely due to the country’s high use of nuclear power to generate electricity.

Currency and external position

The fact that the euro is overrvalued on the two Big Mac measures suggests some competitive pressures on French industry may exist. Even so, France’s current account is expected to be close to balance in 2026, and indeed, up until the 2030s. High net foreign liabilities are, however, still a source of vulnerability, especially when France needs to finance large budget deficits.