France Faces Progressive Fiscal Squeeze Amid Debt and Budgetary Concerns for 2026

France's public finances are under significant strain heading into the 2026 budget discussions, with experts warning of serious risks if spending is not controlled. François Villeroy de Galhau, governor of the Banque de France, cautioned that the country risks a "progressive suffocation" due to rising interest burdens despite Moody's maintaining France's AA3 sovereign credit rating with a negative outlook. He stressed the urgent need for expenditure cuts, particularly in social spending, alongside revenue increases, stating that stabilizing overall spending growth to inflation could reduce the deficit to 3% by 2029.

Similarly, economist Denis Ferrand criticized the political focus on minor financial measures rather than substantial reforms to tackle the growing debt. He highlighted that current parliamentary debate on the 2026 budget has primarily addressed revenue, with expenditure controls and structural issues like pension reform sidelined. Ferrand emphasized the necessity for responsible political discourse and warned that failing to act could tighten financial conditions through higher interest rates.

Moody's itself has pointed to political fragmentation as a greater threat than economic fundamentals, reflecting concerns over political instability amid these fiscal challenges. Pascal de Lima, chief economist at Novaminds, noted this on France 24, underscoring that the internal political climate compounds France's budgetary difficulties.

These developments reflect deep fiscal challenges that require decisive political commitment to reduce spending, manage debt prudently, and restore confidence ahead of the 2027 presidential elections. The uncertainty affecting businesses and households is already contributing to increased savings and postponed investments, further weighing on the economy.