France's 2026 Budget Stalls Amid Political Deadlock, Raising Debt Concerns

France's parliamentary committee has failed to reach consensus on the 2026 budget, delaying discussions on comprehensive fiscal plans into the new year and heightening concerns over deficit control. On Friday, a 14-member committee comprising National Assembly deputies and senators abandoned reconciliation efforts due to persistent disagreements between legislative chambers and political factions.

Prime Minister Sebastien Lecornu expressed regret over lawmakers' unwillingness to compromise, stating on social media: "Parliament couldn't adopt a budget for France before year-end. This deeply saddens me, and our citizens shouldn't bear the consequences." While France avoids US-style government shutdown risks through emergency spending measures, approved fiscal provisions only reduce the 2026 deficit to 5.3% of GDP from this year's 5.4% - missing Lecornu's initial 4.7% target.

Banque de France Governor Francois Villeroy de Galhau warned of potential market backlash should the deficit exceed 5% next year. France's 10-year bond yield premium over German bunds stood at 71 basis points on Friday, down from October's 89bps peak.

Economic indicators show mixed signals: - 2024 GDP growth projected at 1.1%, slowing to 0.8% in 2025 - November inflation eased to 0.8% (vs ECB's 2% target) - Public debt/GDP ratio forecast to rise from 116% (2025) to 130% (2030)

KBRA downgraded France's sovereign rating to AA-, citing political fragmentation's impact on fiscal consolidation. The agency noted: - Interest payments to surge to €59.3bn in 2026 (vs €36.2bn in 2020) - Structural primary deficits averaging 3.4% through 2030 - Limited tax hike potential with revenues already at 51% of GDP

While France maintains exceptional market access due to its eurozone core status, KBRA warned that without sustained reforms, debt dynamics could constrain policy flexibility. The political impasse stems from President Macron's weakened position since losing parliamentary majority in 2022, delaying key reforms like pension adjustments now projected to save just €100 million in 2026 versus original €11 billion annual target.

The fiscal stalemate adds to eurozone challenges, potentially weighing on the euro's valuation during market stress despite unlikely immediate crisis impacts.