French Political Uncertainty Falls

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French Prime Minister François Bayrou’s government survived two no-confidence votes last Wednesday and another Monday, allowing it to pass a budget after months of turmoil. While another confidence motion could follow in the coming weeks, thick political fog in Paris seems to be clearing—likely providing bullish relief for markets.

President Emmanuel Macron—and his Renaissance party—have clung to minority rule since last summer’s snap election, but at a cost. His party’s poor showing in the vote drove out then-Prime Minister Gabriel Attal. Macron then appointed former Brexit negotiator and veteran politician Michel Barnier of The Republicans to replace him in September, seeking the center-right party’s support for his weakened government. That was short-lived, however. When Barnier tried to push through budget austerity, which opposition parties opposed, using the French Constitution’s controversial Article 49.3, the move triggered a no-confidence motion. He lost. Macron then replaced Barnier with the Democratic Movement’s Bayrou in December, hoping the switch would do the trick. But whether he could deliver a budget—and keep his government going—was very much in doubt.

As French bond yields and credit spreads rose from mid-December to mid-January, fears mounted. This sparked further alarm among pundits France faced a “Liz Truss moment”—when bond vigilantes allegedly send yields spiking on fears over debt sustainability. We don’t think that was the right characterization under Truss in autumn 2022 and don’t think it applies to France now, but the nickname has stuck, and its application always indicates a high wall of worry. But like in the UK, French budget concerns turned out to be overblown.

Last Monday, Bayrou pushed through his budget bill and the first part of social security budget legislation. Yesterday, he advanced the remaining part. He did all of this by decree, using Article 49.3 to bypass Parliament. The only way legislators can block a measure advanced under Article 49.3 is through a no-confidence vote—like the one that sank Barnier. This time, though, the opposition fell well short of the 289 votes needed in the 577-member National Assembly to topple Bayrou. They could muster only 128 votes for the first, 122 in the second and 115 in Monday’s third go.

What changed? Bayrou’s budget was less austere than Barnier’s, with concessions to the Socialist and National Rally parties, keeping sufficient support on side. The budget’s main provisions: €30 billion in spending cuts and €20 billion in tax hikes, which together would trim France’s budget deficit from 6.3% of GDP to 5.4% this year, slightly less than what Barnier targeted (5.0%). All this aims to be step one in gradually reducing the deficit to comply with the EU’s 3.0% of GDP deficit “limit.”

Now, not all this is positive. Tax hikes, for instance, can hit corporate profits and household incomes, skewing their decisions. The new taxes include a one-time “exceptional surtax” in 2025 on corporate income for firms with over €1 billion in revenue and an uptick in financial transaction taxes (for currency and stock trading) to 0.4% from 0.3% starting April 1. They also include a tax on stock buybacks, which limits the attractiveness of this means to reward shareholders. And individuals earning over €250,000 will see a new minimum 20% tax rate to reduce tax avoidance. Many of these are pitched as “temporary,” but we have our doubts.

But the estimated €20 billion they raise is less than 0.69% of France’s GDP.^[i] They are miniscule. The same with spending cuts. Not only are they marginal, Bayrou’s proposals have floated around for months. While such measures garner loads of attention, there is little here that likely surprises stocks, which pre-price widely watched, slow-moving developments. The biggest question wasn’t their impact, but whether they would pass—and if the government would stand. With little doubt about that now, markets can move on.

Bayrou used Article 49.3 again yesterday to force through the last part of the budget regarding government expenditure. At this point, another confidence vote looks likely ... but it will also likely face a similar outcome. The upshot should be a weak government that hangs on through this budget back-and-forth atop a Parliament fragmented among 12 parties. That spells gridlock, suggesting the chances major, market-roiling legislation passes is low. Little change means the government picks fewer winners and losers and enables more stable regulation. With the budget behind us, the way forward looks far clearer, which is what matters most for markets.

We see markets reflecting this increased clarity. As Exhibit 1 shows, the MSCI France Index is back at last May’s record high in euros, up 8.4% year to date (8.0% in dollars).^[ii] By comparison, the MSCI World index rose 4.4% in euros (4.0% in dollars).^[iii] A wider reality-expectations gap in France—and Europe generally, in our view—renders a bigger move. We think this will persist through 2025.

Exhibit 1: French Stocks Back Near Record Highs in Local Currency

Source: FactSet, as of 2/11/2025. MSCI France returns with net dividends in euros and dollars, 12/31/2023 – 2/10/2025.

Meanwhile, after rising in late 2024 and early 2025, French 10-year government bond yields have retreated to 3.1% from January’s 3.5% high. (Exhibit 2) The upturn was a global move, but many cast it as a French budget freakout. That fear, though, appears to be fading. In our view, France’s budget battles were always a distraction. There—and throughout the developed world—bondholders get paid first out of government revenues. And with government revenues far exceeding debt payments, French finances remain in fine fettle.

Exhibit 2: French Bond Yields Have Pulled Back With Other Developed Markets’

Source: FactSet, as of 2/11/2025. France, US, Germany, UK 10-year government bond yields, 12/31/2023 – 2/10/2025.

France exemplifies the falling uncertainty we think is likely to propel European stocks this year. In our view, given the levels of ongoing pessimism there, their outperformance is only getting started.

Hat tip: Fisher Investments Research Analyst Ori Powers