Should I Stay or Should I Go?
Since the appointment of the Lecornu government on Sunday 5 October at 8:00 p.m. in France, the catchy chorus of this Clash song has been resounding through the halls of power – from the President to the Prime Minister, through government ministers and members of parliament. Whilst the exit route from this political crisis is still[1] uncertain at the time of writing, its direct consequences on the economy and markets are already palpable.
By handing in his resignation less than 14 hours after his appointment, Prime Minister Sébastien Lecornu holds the record for the shortest government in French history, easily beating the previous benchmarks set during the Third and Fourth Republics. Incidentally, he also holds the record for taking the longest time to appoint a government, an indication of the depth of the political crisis in which France is mired. As news of his resignation hit the wires, financial markets reacted swiftly, demanding an additional premium for French government borrowing vis-à-vis the base rates of its neighbours. The French 10-year bond yield is now higher than that of Spain, Portugal, Greece and Italy – the four countries at the heart of the sovereign debt crisis in the previous decade. This high rate will cause collateral damage in the real estate and French corporate debt markets, even though, paradoxically, some companies can now borrow at a lower rate than the French government.
This political crisis is also likely to dent household and business sentiment, which have already been suggesting little confidence in the future. INSEE business confidence figures for September were already close to the lowest levels seen since the end of the COVID crisis. As for households, their savings rate was already at its highest level since the seventies (apart from the COVID years), indicating a low level of confidence for the future.
And lastly, this turn of events is clearly not good news for the public finances. However it ends – with new alliances for a reconfigured government, a dissolution of parliament, or even the resignation of the President of the Republic – strict management of the 2026 budget looks unlikely. Following in the footsteps of rating agency Fitch, Moody’s and S&P will update their French government credit rating on 24 October and 28 November, respectively, and the likelihood is that they will downgrade France or, at the very least, review the outlook.
On the equities front, the underperformance of French stocks versus their eurozone peers, which began with the dissolution of the government in June 2024, is becoming increasingly severe, signalling investors’ mistrust. Since 6 October, this gap has widened a little more and is now close to 13% on the basis of MSCI indices[2].
The B side of the “Should I Stay or Should I Go?” single of The Clash is the song “Straight to Hell” – let’s hope that the French economy can find a more favourable destination.