Unlock Editor’s Digest for free
Roula Khalaf, editor of the FT, picks her favorite stories in this weekly newsletter.
S&P Global downgraded France in a blow to Emmanuel Macron’s credibility as a steward of the economy, once a bright spot of his presidency.
The credit rating agency changed France’s long-term issuer rating from AA to AA- with a stable outlook, citing concerns that the trajectory of government debt as a share of gross domestic product will increase through 2027 rather than fall as previously forecast.
S&P also said the growth factor in France was lower than expected. Concerns were raised that “political fragmentation” would make it difficult for Macron’s government to implement reforms to boost growth or “address fiscal imbalances”.
The downgrade risks significant political fallout for Macron, but the financial impact is likely to be limited as was the last time there was a significant downgrade following the eurozone crisis around a decade ago.
The bad news on public finances comes as Macron’s centrist alliance is poised for a major defeat in European elections on June 9. Polls show him 17.5 points behind Marine Le Pen’s far-right Rassemblement national party, according to Ipsos. Opposition parties are preparing to debate two no-confidence motions on Monday to challenge the government’s handling of the budget, although at this stage they have little chance of passage.
Macron no longer boasts a parliamentary majority, so he has more difficulty passing laws or budgets, even though the French constitution allows the government to override MPs on budget matters.
“The downgrade by S&P is legitimate because of all the countries in the eurozone, only two remain with such a high debt-to-GDP ratio that is only getting worse – France and Italy,” said Charles-Henri Colombier, Rexecode director of economic institute. “It’s a warning to the government that it needs to do more to cut spending, not just try to boost growth.”
The government has been bracing for a downgrade since it revealed in January that its deficit was larger than expected last year, at 5.5 percent of GDP compared with a forecast of 4.9 percent.
While deficits are typical in a country that hasn’t balanced its budget in decades, the eurozone’s second-largest economy suffered an unforeseen shortfall of 21 billion euros in tax revenue in 2023.
The situation showed the limits of Macron’s strategy since he was first elected in 2017 — to cut corporate taxes and implement pro-business reforms in the bet that such moves would boost growth enough to pay for France’s generous welfare model.
While unemployment fell to its lowest levels in decades and foreign investment rose, the government continued to spend heavily on public services, as well as on exceptional measures to protect businesses and households from the effects of the pandemic and the energy crisis.
This increased the deficit and led to an increase in the national debt.
When interest rates were low, the effects were weak, but borrowing costs rose from 29 billion euros in 2020 to more than 50 billion euros this year — more than the annual defense budget. They should reach 80 billion euros in 2027.
France says it still aims to bring its deficit back to 3 percent of output, the EU threshold, by 2027, the end of Macron’s second term. However, economists consider this unlikely and the new S&P forecast is that the deficit ratio in GDP will be 3.5 percent in 2027.
“We believe that the French economy and public finances in general will continue to benefit from the structural reforms implemented over the past decade,” S&P said. “However, without additional measures to reduce the budget deficit. . . reforms will not be enough for the country to meet its budget targets.”
General government debt as a share of GDP “will continue to grow” to 112.1 percent of GDP in 2027, from 109 percent last year.
Macron’s finance minister, Bruno Le Maire, has scrambled to find savings on everything from climate policies to apprenticeship subsidies to cut an extra 10 billion euros this year, following a 10 billion euro cut in January.
At least another 20 billion euros in cuts will be needed next year, according to the budget ministry, but there is a risk that this will threaten growth.
The government also insisted it would not raise taxes on households or businesses, a hallmark of Macron’s economic policies. Opposition parties criticized that position as unrealistic given the budget gap.
The government is forecasting growth of 1 percent this year, which is higher than the Bank of France’s forecast of 0.8 percent.
Experts say the S&P downgrade is not expected to have a major effect on France’s borrowing costs as investors continue to see the country as a reliable entity. The spread between German and French 10-year bonds has even narrowed slightly this year.
“Our debt easily finds buyers in the market,” Le Maire told Le Parisien newspaper after the downgrade. “France continues to have a high-quality reputation as a publisher, one of the best in the world.”