08.09.20253 min
CIO Perspectives - September 2025: Confidence vote in France - what are the economic and market impacts?
French Prime Minister François Bayrou is set to submit his government to a vote of confidence on 8 September. With the opposition now holding a majority, the anticipated rejection heightens the risk of political deadlock and delays fiscal consolidation efforts. This uncertainty is undermining confidence and is reflected in a higher risk premium on French debt.
A political impasse looms
With the 2026 budget set to be presented in the coming weeks, the government faces the risk of being toppled. If the vote fails, Bayrou will be forced to resign. Emmanuel Macron will then be left with two options: appoint a new head of government in a fragmented parliamentary landscape, or dissolve the National Assembly.
In the meantime, the executive will handle day-to-day affairs, while Parliament will have 70 days to adopt the budget. Transitional measures are in place to prevent a deadlock, drawing on lessons learned from the previous budget process.
An economy under pressure but resilient
The French economy is currently experiencing modest but positive growth momentum (+0.3% in the second quarter) with inflation stabilised at around 1%. Consumer spending is expected to increase, supported by rising real wages and more favourable credit conditions, while private investment could benefit from improved clarity on US tariffs and German infrastructure plans. Growth is projected to pick up to around 0.7% in 2025 and 0.8% in 2026.
However, domestic political uncertainty could dampen business and household confidence, potentially slowing investments and consumption. On the other hand, successful fiscal consolidation and a strong economic rebound in Germany could boost growth and private investment. In the absence of a majority to approve a new budget, the deficit is expected to rise slightly, reaching 5.7% of GDP in 2026, as certain tax measures adopted in 2025 expire.
Financial markets: caution takes hold
Political tensions are already impacting the French bond market. The yield spread between French government bonds (OATs) and German Bunds has widened from 0.65% to 0.8%, reflecting a growing "political risk premium." This premium may persist as long as uncertainty continues.
Nevertheless, France remains attractive to investors thanks to its highly liquid debt market, an average borrowing cost below 2%, and the backing of the European Central Bank. These factors offer reassurance—especially when compared to the more fragile conditions in the US and UK markets.
French equities: controlled adjustments
Unlike the June 2024 parliamentary dissolution, French political risk was already partially accounted for in the equity market, where reactions tend to be temporary. Additionally, over 80% of the revenue of listed French companies is generated outside France, with half coming from outside the European Union (EU). While certain sectors such as construction, concessions, and infrastructure are more vulnerable to domestic political uncertainty, industries such as manufacturing, consumer goods, technology, and healthcare are less exposed. Lastly, the valuations of French companies are in line with their historical averages after adjustments for US tariffs, lower energy prices, and profit-taking in the banking sector.
What are the implications for our investment strategy?
We are maintaining a significant allocation to equities. Despite a geopolitically uncertain environment, moderate earnings growth and expectations of further rate cuts continue to justify a global equity exposure that remains neutral relative to our benchmarks.
However, in August, we downgraded our European exposure from overweight to neutral, as recent European market performance has been driven primarily by multiple revaluations rather than a genuine recovery in earnings, which remain under pressure. With French political risk back in the spotlight—though it poses no threat to Europe as a whole since it is a localised issue—this situation could provide European investors with a pretext to reduce their overweight positions on European assets.
Conversely, the weakening of the US dollar provides significant support for emerging markets, which are currently delivering strong performance and offering a better risk/reward profile than European markets.
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