France is heading into a political and financial storm with Prime Minister François Bayrou placing his government on the line in a September 8 confidence vote.
The decision has rattled investors, driven French bond spreads wider and left business leaders warning that investment is drying up.
But the real story goes beyond the survival of one prime minister.
France risks sliding into a cycle where no government is able to govern, creating a risk premium that markets may not have fully priced in.
What is happening on September 8
Bayrou announced on August 25 that he would call a confidence vote tied to his 2026 budget plan. And that’s a big issue.
France’s deficit stands at 5.4% of GDP in 2025. His plan aims to cut it to 4.6% in 2026 and 2.8% by 2029.
Debt is projected at 117.6% of GDP in 2026, versus 125.3% if no action is taken.
To achieve this, Bayrou wants €44 billion in savings. 4/5 of these should come from spending cuts.
The package includes freezing pension and tax-bracket indexation, slowing public sector hiring and abolishing two public holidays.
He has also floated a new contribution from high-income taxpayers.
The political arithmetic is unforgiving. Bayrou’s centrist alliance holds only 210 seats in the 577-member National Assembly.
The far-right National Rally, the far-left France Unbowed, the Greens and the Communists, together accounting for about 264 seats, have already pledged to vote against him.
The Socialists appear set to join them.
Even the conservative Republicans, whose leader said it would be irresponsible to topple the government, are not preparing to provide lifeline votes.
Winning requires an absolute majority of 289. At present, the numbers are simply not there.
If the government falls, President Emmanuel Macron must either appoint another prime minister capable of piecing together a fragile majority or dissolve parliament for elections.
He has ruled out dissolution in the past, but the alternatives may prove unworkable.
Why the streets matter as much as parliament
Two days after the vote, a loose movement calling itself “Bloquons tout”, or “block everything”, has declared a nationwide shutdown on September 10, although the movement’s origins can’t be accurately tracked.
A fringe group called “Les Essentiels” first circulated the date on social media in July, and ex-Yellow Vests have amplified the call on Facebook and Telegram.
Local meetings have sprung up where participants discuss protests and blockades of supermarkets and petrol stations.
The movement claims to be apolitical but has attracted open backing from Jean-Luc Mélenchon’s France Unbowed, the Greens and the Communists.
The Socialists have expressed sympathy without fully endorsing it.
The National Rally denounces it as left-driven. Major unions have not formally signed on, though many have already announced strike plans for early September.
The parallels with the Yellow Vest protests of 2018 are clear.
Then, a sudden surge in fuel prices triggered months of disruptive street action.
Now, it is the attempt to push through austerity measures that risks drawing people back to the streets.
For investors, the street dimension matters because it narrows the room for any government to adjust policy, even if it can cobble together parliamentary numbers.
How markets are reacting
The news came with an initial shock. On August 25, when Bayrou announced the confidence vote, a basket of French domestic stocks tracked by Barclays dropped 2.9%.
The CAC 40 fell 1.6% the next day, with banking giants BNP Paribas and Société Générale down more than 6%.
French 10-year yields climbed to 3.53%, their highest since March, and the spread over German Bunds widened to 75 basis points, the widest since April.
By August 27, markets had steadied somewhat. The CAC rose 0.4% and the spread hovered at 79 basis points. Yet the reprieve is fragile.
Fund managers warn that the spread could widen to 100 basis points if the crisis deepens.
Fitch Ratings is due to review France on September 12, just four days after the vote, and a downgrade to A+ is on the table.
The warning from investors is that fiscal consolidation is a national imperative, but France’s political system may no longer be capable of delivering it.
Crowded positioning in French bonds adds to the risk of sharp outflows if sentiment turns.
The corporate freeze
Beyond the daily market swings, the more lasting impact may be on French business investment.
Non-financial corporate investment has shrunk or stagnated every quarter since Macron’s snap election in July 2024.
The business federation MEDEF has stated that France is simply falling behind. Companies are now holding off on hiring and capex plans until clarity emerges.
This comes on top of corporate unease with tax changes. The budget adopted earlier this year, after the ouster of Bayrou’s predecessor, introduced temporary hikes for the largest corporations.
Several opposition parties want more of the same. Executives fear that instability will lead to ad hoc taxation, eroding France’s competitiveness.
Government forecasts project 0.7% growth in 2025, already low by international standards.
Prolonged instability threatens to delay fiscal repair by cutting tax revenues, forcing deeper adjustments later.
The uncertainty hurts French companies because the longer they wait, the more they risk losing ground to competitors abroad.
The bigger risk investors are missing
Most commentary frames the crisis as a binary. That means Bayrou survives or he falls.
However, the real danger is that France slides into semi-governability. A cycle of short-lived governments, each too weak to pass meaningful budgets, would leave fiscal reform permanently blocked.
Parliament vetoes cuts, the streets veto taxes, and investors begin to demand an ever higher premium for holding French debt.
This is not the sudden shock of a Liz Truss-style event. It is the grind of drift.
France’s risk premium would edge up year by year, corporates would face higher financing costs, and rating agencies would keep pressure on.
Investors could find themselves exposed to a slow but steady repricing of French assets, harder to trade around than a one-off spike.
For Macron, the temptation will be to avoid dissolution and cycle through prime ministers who can survive week to week.
That may be politically easier than calling another election, but it entrenches the very paralysis that markets fear.
In that scenario, the real story is not Bayrou’s defeat. It is the absence of any leader who is allowed to govern.
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