Political instability aggravating risks for French companies

The political instability in France is causing big problems for business and increasing the risk of social unrest, at a time when external factors are unlikely to help one of Europe’s most indebted economies find a path to growth. The French Parliament has failed to assemble a stable government since June, when snap elections were called by President Emmanuel Macron after a bad performance from his political party in the European elections. Far right and far left parties were the biggest winners in the vote, making it very difficult for prime ministers to form a stable coalition government. Michel Barnier’s government, which first emerged from the election, lasted a mere three months and fell in December. It was followed by the latest administration led by François Bayrou, which has struggled to gather support for key measures such as the government’s budget and much-needed spending cuts. Bayrou surveyed his third no-confidence vote in the less than a month this week. It was called after the prime minister used a controversial constitutional tool known as Article 49.3 to push France’s long-overdue 2025 budget plan through parliament without a vote from the MPs. Oliver Wild, president of Amrae, said that although French companies have prepared themselves to face volatile times, some will surely suffer from the current malaise. “Depending on the sector you are in, it creates a lot of instability and uncertainty when you are already under a lot of stress,” he said. Wild pointed out that the instability is particularly hard on small businesses, many of which are struggling right now. According to credit insurer Coface, the number of business failures in France, including both bankruptcies and judicial restructurings, increased by 18% in 2024. The trend seems likely to continue this year. But even larger companies have reason to be worried. France has a budget deficit of 5.5% of GDP and is under pressure by the markets and the EU to address this issue. Bayrou’s contentious budget bill, which is now automatically adopted, aims to cut €30bn of spending and raise taxes by €20bn to limit France’s deficit this year. One of the most urgent measures appears to be reform of France’s pension system, which is highly unpopular and looks extremely difficult for a prime minister who does not have a stable majority. To further complicate matters, French law says that new elections can only be held 12 months after the previous one, which means that a new Parliament cannot be chosen until June. Even then, there are no signs of which shape it would take, notes George Dyson, a senior analyst at Control Risks. “The current situation is inherently unpredictable,” he said. “And that is not good for business.” The uncertainty is no doubt creating a more challenging business environment for French companies, and even before the political problems, the French economy was faltering. In November, the French Central Bank cut its 2025 growth forecast from 1.2% to 0.9%, and that was before the fall of the Barnier government. “It all comes at a bad moment for the French economy,” said Bruno de Moura Fernandes, head of economic research at Coface. Crédit Agricole forecast that investments by French companies will stall this year, and that consumers will prefer to save rather than spend due to the current volatility. The bank even forecast that France’s public deficit will go up rather than down, to reach 6% of GDP, which is twice the threshold set by EU rules. Fixing all that may be out of the reach of the Bayrou government, which lives in the shadow of further votes of no confidence similar to the one that brought down its predecessor. External geopolitics are unlikely to be provide a balm for the French economy. The possibility that the new Donald Trump government will apply extra tariffs on EU exports is a major concern. So is the economic situation in Germany, which is faring even worse than France and will host elections on 23 February. Then there are the geopolitical waves caused by the Ukraine-Russia war, the Middle East turmoil and armed conflicts in African countries where French firms have business interests. Add to that the impact of climate change and the extra red tape brought about by a flurry of EU regulations, and it is not surprising that French companies feel gloomy right now. A survey by EY with foreign investors found that 50% of French firms believe France is less attractive since last June’s election, and a similar ratio are planning to tone down their investment projects in the country. Then there is the impact of a slower economy on the whole of society. Crédit Agricole expects unemployment to go up 0.4%, closing the year at 7.8%. While this is moderate by historical standards, it raises the risk of another spate of strikes and protests like those carried out by the Yellow Jackets movement between 2018 and 2020. “France’s rumbling political crisis and negative fiscal outlook make further social unrest likely in the months ahead,” Middleton pointed out. “France ranks as the highest-risk country in Europe on our predictive Civil Unrest Index, which forecasts the likelihood of large-scale protests over the next 12 months.” The uncertainty is preventing companies from properly planning their investments and makes risk mapping a much more challenging exercise. For example, experts say there is a clear risk that, with spending cuts always unpopular in France, companies may be forced to bear a large share of the unavoidable fiscal adjustment. “People are talking about increasing corporate tax rates. It would bring the corporate tax back to 33%, which is around the 32% we used to have some time ago. It obviously changes business plans,” Wild pointed out. “Can a large business absorb it? It probably can, to a certain extent. But I can see many large businesses anticipating the change, looking for economies of scale and trying to shave off costs here and there. And also trying to be more efficient.” “But it is all part of that uncertainty. You can have different scenarios, but at the moment we are just hanging there and waiting. There may be positive or negative consequences when the penny drops, but what everyone wants right now is that the penny drops,” he added.

Political instability aggravating risks for French companies

Business left hanging with further unrest likely

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