France skirts another crisis and markets like it — but reform suffers

French Prime Minister Sebastien Lecornu’s decision to suspend a controversial pension reform has given markets some welcome relief Wednesday, with the move appearing to stave off another government collapse — at least for now.

But the axing of the 2023 reform — a key part of President Emmanuel Macron’s legacy which would have seen the retirement age raised from 62 to 64 — and the saving of a beleaguered government, comes at a cost.

“There will be no increase in the retirement age from now until January 2028,” Lecornu told lawmakers in the National Assembly on Tuesday as he presented his government’s policy roadmap.

Lecornu proposed the concession — as well as promising not to force the budget through parliament — in order to gain the support of the Socialist Party ahead of no-confidence votes against the government on Thursday.

The center-right Les Republicains party has also said it would not support the motions which have been tabled by blocs on the far-left and far-right.

With the survival of Lecornu’s government now looking likely, that has revived hopes that a 2026 cost-cutting budget will be passed that aims to tackle France’s deficit and debt pile.

Investors reacted positively to the prospect of France’s fifth PM in less than two years avoiding being ousted, with France’s CAC 40 up 2.5% — notching its biggest daily gain since April — and the euro rallying 0.2% against the dollar.

The proposed axing of the pension reform won’t come cheap and it also means France is taking a step backwards on what’s seen as a much needed and long-overdue structural reform.

France’s retirement age of 62 — and the proposed increase to 64 (and a requirement that the retiree has worked at least 43 years) — is far lower than lower than the standard age in many other European countries; the pension age is set to rise from 66 to 67 in the U.K. in 2026, for instance, stands at 65 in Germany and is 67 in Italy.

Resistance to changes in the age and contribution requirements runs deep in France, however, and Macron resorted to using special constitutional powers to push his pension reform plan through the lower house of the National Assembly in 2023, angering lawmakers and prompting widespread protests and industrial action.

Now, his signature reform has been pushed back and analysts saying it could be diluted further, impacting France’s fiscal outlook.

The suspension of unpopular pension reform is expected to cost 400 million euros ($465 million) in 2026 and 1.8 billion euros in 2027, according to Lecornu, who said such costs “will need to be offset by savings” and “cannot be done at the cost of an increased deficit.”

Economists at Goldman Sachs said the suspension of the pension reform until the 2027 presidential election will only have a limited impact on the near-term fiscal outlook. If the suspension continues beyond that, it could derail debt and deficit reducing efforts.

“The cost in the medium-term would remain contained, too, if the retirement age and contribution period continue to increase after 2027, as currently proposed … But the risks likely skew towards a longer suspension (in particular if the pension reform remains a contentious topic ahead of the 2027 presidential elections) with more significant impact” on the outlook, they said in emailed analysis Wednesday.

France’s independent public auditor estimates that the yearly cost to public finances of a permanent suspension of the pension reform would amount to 20 billion euros (0.5% of GDP) by 2035.

“France’s public debt would therefore increase by an additional 3-4 percentage points of GDP over the next decade and stabilise closer to 130% of GDP,” they said. France’s debt-to-GDP ratio stood at 113% in 2024.

The centrist government has insisted that fiscal consolidation remains its central mission, with Lecornu saying Tuesday that he’s targeting a budget deficit of 4.7% of GDP in 2026, down from the 5.5% of GDP seen this year.

He insisted the budget would not be an austerity one, however, and while stopping short of outlining a wealth tax in his policy plans, Lecornu hinted that he would look for an “exceptional [one-off] contribution from large fortunes,” without providing further detail.

Claudia Panseri, UBS’s chief investment officer for France, said that even if the government can pass the budget for 2026, France’s fiscal situation is unlikely to improve significantly.

“We anticipate France’s debt- to-GDP ratio, already at 113% in 2024, will deteriorate by an additional 2–3
percentage points per year in the medium term,” Panseri said in analysis Wednesday, with UBS expecting the deficit to stay above 5% in 2026.

Investors with global portfolios should consider reducing exposure to long-dated French government bonds, she added, and monitor developments closely, “as political shocks in France can have spillover effects on broader European markets.”

Shorter-dated French bonds are less sensitive to the debt concerns and offer good yield levels for their low default risk, Panseri said.