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[MARKET ANALYSIS] French PM Lecornu's U-turn opens the door to a 2026 budget passing, removing near term political risk but doing little for the longer-term fiscal outlook

Lecornu's decision to utilize Article 49.3 to pass the 2026 budget effectively mitigates immediate political risks, which has led to a narrowing of the yield spread between French OATs and German Bunds.

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[MARKET ANALYSIS] French PM Lecornu's U-turn opens the door to a 2026 budget passing, removing near term political risk but doing little for the longer-term fiscal outlook

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  • TL/DR: Lecornu U-turns on Article 49.3 and makes concessions to PS, meaning the 2026 budget has a reasonable chance of passing. A narrative that has removed some near-term political uncertainty, and thus the yield spread to Germany has narrowed. However, the compromises and general lack of fiscal progress mean fiscal reform has likely been delayed until 2027's budget, adding even more pressure to a Presidential election year.
  • French PM Lecornu has decided to use Article 49.3, instead of using an executive order (Article 47.3) to pass at least the revenue component of the budget. A decision made after weekend discussions with the Socialist Party (PS), which led to them agreeing not to censure the government following the compromises Lecornu offered. Compromises include changes to policy on social housing spending and income support; however, PS makes clear that the measures remain insufficient and more needs to be done.
  • Nonetheless, while the PS is not willing to provide outright support to the budget, they are also not willing to censure the government and bring it down.
  • As such, the current plan is for Lecornu to take the helm of the revenue debate when it resumes on 20th January at 15:00GMT. Thereafter, he will outline his case and the compromises made before beginning the Article 49.3 process. This allows parties to table no-confidence motions against the government; both the far-Left (LFI) and far-Right (RN) are likely to do so. Motion(s) will be heard on Friday, 23rd of January.
  • The threshold for a no-confidence motion to pass is 288/577 National Assembly votes. As such, if PS does not support the motion, then it is likely it will not pass, and as such, the National Assembly will have confidence in Lecornu's government. A narrative that has sparked narrowing of the OAT-Bund 10yr yield spread, down to a 65bps YTD low. Note, Politico highlights that some doubt remains, evidenced by MoDem from the centre-right and led by former PM Bayrou, whose President Fesneau has criticised the bill and compromises to PS, saying he does not "believe in magic when it comes to budgetary matters".
  • Assuming the revenue portion passes, then Lecornu is expected to commence the process for the spending component of the bill. Politico reports that the aim is a budget around January 30th, according to an advisor.
  • While the use of Article 49.3 allows the budget to move forward and shouldn't lead to the downfall of Lecnornu's government, the concessions reportedly made to PS and the general lack of progress on reform mean the French fiscal situation remains a dire one, and talks for the 2027 bill will likely be even more difficult, as the need for reform continues to grow and 2027 is a Presidential election year (exp. April 2027).
Context

However, the concessions made to the Socialist Party highlight underlying fiscal challenges that could pressure future budgets, especially with a Presidential election approaching in 2027, suggesting that while the short-term outlook improves, deeper structural issues remain unchecked.

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