UBS Expresses Concern Over Political Uncertainty in France Ahead of 2025 Budget

The political climate in France remains uncertain as the country awaits the appointment of a new Prime Minister, as emphasized by analysts at UBS in a report released on Wednesday.

The analysts pointed out that President Emmanuel Macron’s dismissal of Lucie Castets, the Prime Minister candidate from the left-wing alliance New Popular Front (NFP), has heightened the political tensions as France gears up for the new school year and the upcoming Paralympic Games.

Macron’s rejection of the NFP candidate places France in an extraordinary political situation. With a budget plan for 2025 expected to be unveiled soon, the lack of a new Prime Minister contributes to the prevailing uncertainty. Although the NFP secured 193 seats in the National Assembly, this falls short of the 289 seats needed for an absolute majority.

Additionally, other political factions have signaled their intention to support a no-confidence motion should an NFP government take shape. Consequently, Macron is urged to swiftly seek a compromise to prevent an institutional impasse as the budget presentation approaches.

The report suggests that major shifts in fiscal policies are unlikely, particularly due to the right-wing majority in the Senate, which is expected to resist any significant budgetary deviations.

Under the EU’s Stability and Growth Pact, France, which is currently in an excessive deficit procedure, is required to achieve a fiscal consolidation of at least 0.5% of GDP annually. The incoming government will need to engage in technical discussions with the European Commission and present its long-term fiscal plan by September 20th.

The ongoing political uncertainty may also affect financial markets. The analysts noted that the yield spreads between French and German Bund bonds remain elevated compared to historical averages.

Given the limited clarity surrounding political and regulatory developments, market volatility in French bonds is likely to continue. UBS predicts more favorable investment opportunities in countries with a more stable debt outlook.