French Political Instability Triggers Economic Uncertainty and Market Decline
The resignation of France's Prime Minister Sébastien Lecornu has sparked significant economic instability, affecting markets, investor confidence, and budgetary plans amid fears of a looming financial crisis.
- • Prime Minister Sébastien Lecornu resigned just 14 hours after government formation, intensifying economic uncertainty.
- • Paris stock exchange dropped 1.36%, and 10-year French bond yields rose to 3.61%, the highest since March.
- • The political crisis could lead to a 0.3 point GDP loss, about 9 billion euros, with deficits projected to increase to 5.7% by 2026.
- • Economic stagnation is pronounced in regions like Corsica, with reduced consumption and investment negatively affecting employment.
Key details
The unexpected resignation of French Prime Minister Sébastien Lecornu, just 14 hours after the newly formed government took office, has plunged France into an economic crisis marked by market instability and investor apprehension. The political turmoil exacerbates existing economic vulnerabilities, casting doubt on the country's fiscal future as it struggles to submit the 2026 budget amid growing financial pressures.
Financial markets reacted sharply to Lecornu's departure. The Paris stock exchange closed down 1.36%, while French bank stocks fell, reflecting shaken investor confidence. Notably, the 10-year French government bond yield surged to 3.61%, its highest since March, before settling at 3.57%, and the spread between French and German 10-year bond yields widened to 0.85 percentage points—the largest gap since January. The euro weakened against the dollar, signaling concerns over France's political and economic direction, particularly the fear of a rollback of reforms under potential left-wing influence.
Economists warn that the economic consequences are severe. A major French bank executive highlighted that while mortgage and business loans show slight growth, the risk of defaults is increasing. The political instability has inflated costs for businesses, dampened industrial production—the country's performance lags behind other nations since the pandemic—and deterred foreign investment. Moody’s is expected to review France’s credit rating following Fitch’s downgrade to a level shared with smaller economies such as Malta and Estonia.
The economic fallout could result in an estimated 0.3 percentage point loss in GDP, equivalent to roughly 9 billion euros, while deficits may swell to 5.7% of GDP by 2026. In Corsica, the economic effects are tangible: decreased consumption and investment threaten employment, with sectors like construction and automotive facing stagnation. Jean-André Miniconi, a local business leader, underscored increased savings at the expense of spending, declining profits, and a weak national GDP growth rate of about 0.7%, which is insufficient to sustain social policies.
Adding to the urgency, Lecornu’s resignation complicates the government's ability to present a budget by the October 13 deadline, raising the possibility that parliament will need to pass a special law to maintain minimal government funding. The political climate's impact on economic confidence has led some political parties to call for the dissolution of the government, further amplifying uncertainty.
As France navigates this precarious period, experts caution that without political stability and prudent fiscal management, the country risks deeper economic decline. Measures to restore market confidence, control public debt, and stimulate growth are critical to halting what has been described as a "catastrophic impression of endless decline."