In recent events, the international credit rating agency Moody's has downgraded France’s long-term credit rating to Aa3, voicing deep concerns about the economic outlook amid ongoing political turbulence. This downgrade comes on the heels of a steadily weakening economic recovery in France, compounded by the adverse effects of political fragmentation and enduring structural issues within its economy. These intertwined uncertainties are expected to continually hinder France's economic growth.

At the beginning of December, former Prime Minister Barnier took a significant political gamble by invoking Article 49-3 of the French Constitution to bypass parliament and force the social security budget through. This decision sparked a joint backlash from both the left and far-right, leading to a motion of no confidence in the National Assembly that ultimately resulted in Barnier’s government being ousted. His term became the shortest for any government in the history of the Fifth Republic. In response to this political shake-up, President Macron appointed François Bayrou, chairman of the Democratic Movement party, as the new Prime Minister. The decision aims to leverage Bayrou’s centrist political influence to bridge the deep divides within French politics and rapidly restore public finances while establishing a stable government. This involves promptly drafting new fiscal legislation to quell growing anxieties and stabilize expectations among various stakeholders.

Despite these efforts, Bayrou expressed the daunting challenge he faces, stating: “Leading a government in a severely divided country with no clear parliamentary majority will be a Herculean task.” Both far-left and far-right factions have issued stern warnings, indicating that if Bayrou opts to continue along the path dictated by Macron, the new government could risk encountering challenges from its inception. It is evident that no matter how Bayrou navigates this complex political landscape, his pursuit of equilibrium and stability will be fraught with hurdles, particularly as debates surrounding critical issues such as budgets and fiscal policy will reignite divisive discourse.

This prevailing political disorder led Moody's to downgrade France’s long-term credit rating from Aa2 to Aa3, marking the second downgrade from international rating agencies this year, following Standard & Poor's earlier decision to decrease France's rating from AA to AA-. Such repeated downgrades underscore the prevalent skepticism surrounding France’s economic prospects. Moody's highlighted that the current political divisions significantly weaken France's public finances, predicting a low likelihood of ongoing efforts to reduce the fiscal deficit effectively in the foreseeable future.

The current round of political instability has given rise to multiple crises, reflecting deep-rooted structural challenges within the French economy that disrupt political stability. The interaction between these factors creates a vicious cycle characterized by “political turmoil—diminished expectations—weak recovery—ideological divisions,” trapping the nation in a paradoxical and protracted conflict.

Increasing downward pressure on the economy is becoming evident. According to the latest economic outlook report from the French central bank, the projected growth rate for 2024 has been revised down to just 1.1% and is expected to decline further to 0.9% by 2025. Olivier Garnier, the chief economist at the French central bank, commented that “the French economy faces intensifying downward risks, prompting consumers and investors to adopt a more cautious wait-and-see approach.” He emphasized the need for a balanced policy approach that combines deficit reduction with stimulating economic recovery to meet the policy objective of lowering the deficit to between 5% and 5.5% of GDP by 2025. Estimates suggest that real economic recovery might not materialize until 2026 or 2027, when growth could still be around a low of 1.3%. Data from the French National Institute of Statistics and Economic Studies indicates that the economy is likely to stagnate in the fourth quarter of 2024, with only minor improvements projected in the first half of the following year.

Some economists warn that both engines driving economic growth seem to be faltering. The first, public spending, remains hampered by political uncertainty, which hinders the effectiveness of fiscal stimuli. The second is international trade, as potential policies from the new U.S. administration threaten to suppress France’s external trade expectations. Structural ailments persist and further constrain the pace of France's economic recovery. On the consumer front, increases in purchasing power have not translated into growth-boosting effects, while ongoing political turmoil exacerbates consumer hesitance, thereby undermining previous stimulus measures. In terms of debt, Moody's projects that by 2025, France’s deficit could reach approximately 6.3% of GDP, with public debt likely continuing to deteriorate, intensifying the conflict between deficit reduction and growth stimulation efforts.

Cumulatively, the labor market is under significant strain. Economic downturns and the loss of productivity during the pandemic have maintained pressure on employment, with projected unemployment rates hitting a peak of around 7.8% in 2025 and 2026. Since President Macron announced the dissolution of the National Assembly last June, the French political landscape has remained volatile, leaving Macron isolated and amplifying the inherent contradictions of political fragmentation against a backdrop of sluggish economic recovery.

Despite fleeting compromises yielding temporary relief, they do not fundamentally shift the prevailing fragmented political landscape. Public opinion is divided, parties are entrenched in their positions, and the democratic deadlock fueled by deep-seated disagreements seems poised to continue. Under this trifecta of centrist, left-wing, and far-right factions, critical fiscal matters, like budgetary discussions, are destined to become battlegrounds, draining opportunities for economic recovery while exhausting public expectations and trust. Former EU Internal Market Commissioner Breton notably cautioned, “The French economy has been stagnant for nearly a year; we have had four different Prime Ministers while overall economic activity remains sluggish. This cautious attitude towards investment poses substantial risks for many companies seeking major restructuring during this tumultuous period. A stable government is urgently needed.”

Many economists assert that regardless of the approaches to the contentious budgetary proposals—whether it involves increasing expenditure to spur growth or reducing deficits to pursue fiscal balance—the ultimate goal should be addressing the core demands of citizens and businesses. Recent surveys indicate that, during this holiday season, approximately one-third of the French population worries about being unable to give gifts, while about 54% of families feel they cannot provide their children with desired presents. Notably, around 58% of impoverished families report tightening their holiday budgets. This situation underscores the urgent calls from French citizens for stability and recovery. The extent to which the government can genuinely anchor its initiatives on these concerns, cultivate a shared resolve, and address existing differences will continue to test the wisdom and determination of the French government.