Navigating France’s 2026 Budget: Challenges and Opportunities

A Challenging Budget Ahead for France’s Economy Minister

For France, the euro zone’s second-largest economy, the road to finalizing the 2026 budget is expected to be "demanding," according to French Economy Minister Eric Lombard. Speaking to CNBC’s Charlotte Reed, Lombard emphasized the difficulty of balancing the nation’s finances as the country works to reduce its public deficit. This comes after a tumultuous period in French politics, where lawmakers only recently adopted the 2025 budget following several attempts to topple the government. The focus now shifts to 2026, with the goal of further shrinking the deficit and ensuring it remains below 5.4% of GDP in 2025, before dropping below 3% by 2029. This aligns with European Union spending rules, which mandate that member states keep their deficits below 3% of GDP. Lombard noted that while the final target for 2026 has not been set in stone, the government is committed to a path of fiscal discipline.

Political Instability and Market Impact

The absence of a clear budget and broader political instability in France have had a ripple effect on markets in recent months. Lombard acknowledged the "negative impact on growth" caused by these uncertainties, expressing hope that investors will now return to France as the situation stabilizes. The government’s ability to pass the 2025 budget has provided a sense of relief, but the road ahead remains fraught with challenges. France’s economic performance has been lackluster of late, with a 0.1% contraction in the fourth quarter of 2024, following 0.4% growth in the previous quarter. The Bank of France anticipates a modest 0.1-0.2% increase in GDP in the first quarter of 2025, driven by expected gains in market services and the energy sector. Meanwhile, the International Monetary Fund (IMF) projects a full-year growth of 0.8% for 2025, highlighting the challenges France faces in achieving robust economic expansion.

Pension Reform Back in Focus

Now that the 2025 budget has been finalized, attention has shifted to the fate of President Emmanuel Macron’s controversial 2023 pension reform. The legislation, which seeks to gradually raise the retirement age from 62 to 64 to ensure the long-term solvency of France’s pension system, has been a lightning rod for opposition. The reform was met with fierce resistance, leading to widespread protests and political upheaval. However, with the budget now in place, new Prime Minister Francois Bayrou has signaled that the pension reform could return to the agenda. This move will serve as a key test of France’s ability to rein in its deficits and implement structural reforms. Lombard expressed confidence in the ability of workers’ representatives and employers to reach an agreement on adjustments to the reform, noting that they have three months to negotiate. If a consensus is reached, the proposal could be brought before parliament as early as this year.

Fitch Ratings Warns on Pension Reform Rollback

Fitch Ratings has sounded the alarm on any potential reversal of the pension reform, warning that such a move could undermine France’s medium-term fiscal outlook. In a note issued on February 10, Fitch cautioned that rolling back the reform could undo some of the planned fiscal consolidation and have a "moderately negative" impact on France’s fiscal health. The agency highlighted that France’s pension-related expenditures are among the highest in the EU, making the reform a critical component of the country’s efforts to reduce its public deficit. These warnings underscore the stakes involved in the pension reform debate and the importance of maintaining a fiscally responsible path.

Collaboration with Stakeholders Key to Success

Lombard emphasized the importance of collaboration with political parties, unions, and employers in achieving consensus on key policies. The government plans to work closely with these stakeholders to identify areas where adjustments can be made to reduce spending in 2026. By engaging in open dialogue and building broad support, the government aims to create a stable foundation for the budget. Lombard expressed optimism about the ability of all parties to come together in the interests of the country, noting that such collaboration is essential for navigating the challenges ahead.

Conclusion: France’s Road to Fiscal Stability

As France looks to finalize its 2026 budget, the country faces a complex landscape of political, economic, and social challenges. While the government has made progress in reducing its public deficit, the road ahead remains demanding. The fate of the pension reform, the engagement of stakeholders, and the ability to maintain fiscal discipline will all play critical roles in determining whether France can achieve its economic goals. With political stability beginning to return, there is hope that investors will once again view France as an attractive destination. However, the coming months will be crucial in determining whether the government can build on the progress made and set the country on a sustainable path to growth and stability.