Investor confidence in France is deteriorating as political gridlock and budgetary uncertainty deepen. The French government, under Prime Minister François Bayrou, has faced eight no-confidence votes since December and is facing increasing skepticism over its ability to stabilize the economy. The central issue: an unresolved €40 billion fiscal gap for the 2026 budget, with no parliamentary majority to implement spending cuts or raise revenues.

France now holds the most significant budget deficit in the eurozone—around 6% of GDP—while neighboring countries have begun to bring their fiscal houses in order. Germany, Italy, and Spain have demonstrated progress in reducing their deficits, which has reinforced investor sentiment in their bond and equity markets.

The financial markets are reacting. France’s 10-year bond yield spread over Germany’s benchmark has climbed to nearly 70 basis points—well above pre-election levels and on par with countries traditionally considered more fiscally vulnerable. Italy’s spread, by comparison, has narrowed to just 25 basis points, reflecting growing confidence in its budget discipline.

French equities are also underperforming. The CAC 40 index has returned roughly 5% year-to-date, lagging behind Germany’s DAX at around 20%. Asset managers such as BlackRock and Candriam have scaled back their French bond holdings, citing heightened political risk and unclear fiscal direction.

At home, business sentiment and consumer confidence are deteriorating. Economic indicators point to stagnation in private investment and subdued household spending. Revised GDP projections show France slipping behind Germany for 2026, with growth expectations of just 1% versus Germany’s 1.3%.

The political landscape remains volatile. Ongoing investigations involving Marine Le Pen, coupled with speculation over early elections, have added another layer of instability. Finance officials warn that without a credible budget plan, France could face rating downgrades—or, in a worst-case scenario, need external financial intervention.

Strategic responses include forming a temporary cross-party budget coalition, issuing shorter-term debt instruments to stabilize yields, and pivoting toward stimulus via high-return infrastructure and digital projects. France may also need to coordinate with the European Central Bank to activate policy tools, such as the Transmission Protection Instrument, to counter bond market volatility.

Absent a clear fiscal plan, France risks marginalization in the eurozone’s recovery narrative.