French President Macron is poised to name a new Prime Minister within 48 hours, tasked with navigating France's political instability, securing a state budget, and addressing a 5.8% GDP deficit and substantial debt pile. The central challenge for the incoming PM will be to find a compromise with rival parties, particularly regarding the contentious pension reform, which analysts warn would cost €13 billion annually if scrapped, reduce GDP, and damage market confidence. Macron aims to avoid new parliamentary elections, which could empower the poll-leading far-right, potentially leading him to appoint a neutral figure or technocrat to stabilize the Eurozone's second-largest economy and ensure budget approval.
Market attention turns to France again Thursday after President Emmanuel Macron's office said last night that he will name a new prime minister in the next 48 hours. Macron thanked outgoing Prime Minister Sebastien Lecornu for his efforts in holding last-ditch talks with various parties over whether there could be a way out of France's ongoing political morass without holding new parliamentary elections, which would likely benefit the poll-leading far-right. With Lecornu's departure confirmed, Macron now turns to the tricky task of picking a PM who can find a compromise with rivals over the state budget and the urgent task of reducing France's deficit and debt pile. Macron would ideally like to see hard-won reforms, particularly his unpopular pension reform, left alone but there have been rumblings that it might need to be tweaked, or scrapped altogether, as a way to reach a compromise between a new minority government and other parties — particularly the Socialist Party, which is seen as a kingmaker — that might be willing to support a new PM, but at a high price. As with so much in French politics over the last year, arguments are already emerging over that, with the center-right Les Republicains party saying they don't want there to be any review of the pension reform. "In any way, there must be a political solution at some point in time," Eric Chaney, economic advisor to Institut Montaigne and former chief economist at AXA, told CNBC, but he said freezing or canceling the pension reform would be costly, in more ways than one. "Firstly, there would be a budgetary cost of around 13 billion euros [$19.6 billion] per year if this pension reform is frozen," Chaney told CNBC's Charlotte Reed in Paris on Thursday. "The second reason is that one of the key points of the pension reform is to raise the retirement age to 64 [from 62], which is not a lot compared to other European countries, and it has allowed the participation rate of senior people in the labor market to rise ... so if you remove that you will have less production, less GDP and less tax receipts for the government," Chaney said. "But the third reason is even more important and it's the political one, because if you cannot have any pension reform then what kind of reform can you have in this country? That would be a catastrophe," he added. Plus ça change ... or not? Macron is being urged not to pick yet another centrist ally as prime minister given the resignation of Lecornu or the ousting of Francois Bayrou and Michel Barnier, whose governments were brought down by rival parties and no-confidence votes in the last year. There's hope that, by picking a candidate who's not from Macron's own ill-fated and unpopular political stable, a budget might have a better chance of being agreed upon. That's crucial for the euro zone's second-largest economy that has the third-largest debt pile after Greece and Italy. France's budget deficit was 5.8% of its gross domestic product in 2024. Nabil Milali, portfolio manager at Edmond de Rothschild Asset Management, told CNBC on Thursday that Macron might be tempted to pick a more "neutral" figure or technocrat this time. "Probably after trying three people from the center-right he will pick a more neutral figure to lead a technical government whose sole mission will be to vote on any kind of budget before the end of the year," Milali said. "There are at least two difficulties in this scenario — first of all is to find this rare gem, a political figure who is sufficiently neutral for both the left and right. The second is that concessions will still have to be made to the Socialist Party, which is still the kingmaker in the current National Assembly, and the main sticking point is still the pension reform." Milali warned, however, that any scrapping of the pension reform would prove costly for Macron, it being the only real structural reform of his second term in office and key part of his political legacy, and for France in terms of financial market reaction. Read more No budging from the far-left, or far-right? After Lecornu resigned on Monday, Macron asked him to hold 48 hours of last-ditch talks with rival parties to see if there was a way out of the political deadlock which has gripped France for months and brought down successive minority governments. Specifically, Lecornu was looking to see if there was a way to avoid dissolving parliament and calling new parliamentary elections. Lecornu said on Wednesday evening that those talks had shown that a majority of lawmakers opposed dissolving parliament and that a "platform for stability" exists. Earlier in the day he had also said he believed it would be possible to have a 2026 budget in place by the end of the year. Macron and his centrist bloc are anxious to avoid new elections as a ballot would likely benefit Marine Le Pen's anti-immigration National Rally party. It is currently leading voter polls, seen with around 32% of the vote compared to 25% of the vote being held by left-wing alliance, the New Popular Front. Given the polls and smelling blood, both the far-left and far-right are calling for fresh elections, believing they can tempt voters to vote decisively this time after inconclusive elections last summer. Those were called by Macron in a bid to gain "clarity" but instead achieving anything but, becoming the source of the ongoing crisis that is still plaguing France today. President Macron's imminent appointment of a new Prime Minister within 48 hours is a critical move to address France's profound political instability and avoid snap elections that could benefit the poll-leading far-right. The incoming PM faces the immediate challenge of securing a state budget and tackling the nation's 5.8% GDP budget deficit and substantial sovereign debt, which is the third largest in the Eurozone after Greece and Italy. This appointment is crucial for stabilizing the Eurozone's second-largest economy amidst its ongoing political morass. A central point of contention remains the pension reform; its potential reversal, sought by some for political compromise, carries an estimated €13 billion annual budgetary cost. Such a move would also negatively impact GDP and tax receipts by reducing labor market participation among older demographics, undermining a key structural reform of Macron's second term and potentially damaging France's fiscal credibility. Macron's likely strategy of appointing a "neutral" or technocratic PM aims to facilitate cross-party consensus, particularly with the influential Socialist Party, perceived as a "kingmaker." However, this approach still necessitates significant concessions and comes amidst a "strongly negative" market sentiment, indicating high investor concern over France's fiscal trajectory and political stability. The political maneuvers carry a market impact score of 0.75, reflecting their profound implications for both French and broader European financial markets.
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