France has recently rolled out a series of deficit reduction proposals in an attempt to reverse its deteriorating fiscal position, providing temporary relief to the French bond market. The yield on France's 10-year government bond fell about 12 basis points on Tuesday to around 4.75%, and the spread against German bunds of the same maturity also narrowed.

The French government plans to bring next year's deficit ratio below 5% of GDP through spending cuts and controls on pension expenditure. Meanwhile, the National Rally led by Marine Le Pen has put forward a "shadow budget" that envisions cutting more than 140 billion euros in spending, reducing next year's deficit ratio to 3.7%, and further lowering it to 2.2% by 2032.

However, whether these plans can actually be implemented still faces significant obstacles. The government may need to invoke Article 49.3 of the constitution to push the budget through without a parliamentary vote, while also confronting parliamentary opposition and escalating street protests. Le Pen's plan, for its part, is merely a policy vision for a future administration and would still require support from other political parties to be implemented.

French Government Prepared to Use Constitutional Tools to Cut Spending

According to The Wall Street Journal, French Finance Minister Roland Lescure said the government is willing to negotiate over the budget content but has two red lines: keeping the budget deficit ratio below 5% of GDP and avoiding measures that harm economic growth.

If parliamentary negotiations reach a deadlock, the government is prepared to invoke Article 49.3 of the French constitution to bypass the National Assembly and directly push through a spending cut plan totaling about 43 billion euros (approximately 48 billion U.S. dollars). "We will use every means at our disposal," Lescure said.

Article 49.3 allows the government to advance legislation without a final parliamentary vote, but lawmakers can counter by filing a motion of no confidence. If such a motion passes, the government would be forced to step down and the budget bill would collapse with it. Lescure said that even if the government judges it cannot survive a no-confidence vote, it could still advance the budget through a series of executive orders 70 days after the budget bill is submitted and before a final vote is held. "It's a guardrail," he said. "There is always a backup plan."

Pensions are one of the main points of contention in the budget negotiations. Lescure proposed reducing the inflation-linked adjustment of pensions, noting that pension spending rose 5.4% in 2024, an increase of about 15 billion euros. Without action, pension spending is expected to rise by another 15 billion euros next year.

Lescure also disclosed that a special clause has been added to the budget allowing the winner of next spring's election to roll back some budget measures, including pension-related provisions, in exchange for limited support from Le Pen's camp and that of Jean-Luc Mélenchon.

Le Pen Proposes a More Aggressive "Shadow Budget"

Compared with the government, the fiscal consolidation plan put forward by Le Pen is more aggressive. She plans to cut more than 140 billion euros in spending, bringing next year's deficit ratio down to 3.7% of GDP, below the government's 5% target, and further reducing it to 2.2% by 2032.

Specific measures include compressing domestic spending, reducing transfers to the European Union, and cutting immigration-related expenditure.

UBS market analyst Nana Antiedu said that after Le Pen unveiled her "shadow budget," French government bonds continued to outperform, with the 10-year OAT yield falling 12 basis points to 4.74%. However, she also noted that this is still only a shadow budget representing the policy intentions of Le Pen's party should it come to power in the future. Even if the National Rally wins the 2027 presidential election and completes the relevant legal procedures, bringing the deficit ratio below 3% by 2032 would still require support from other political parties.

Rich Privorotsky, head of Goldman Sachs' trading desk, believes the OAT market has already priced in a lot of positive news, leaving limited room for further improvement. The key question is whether Le Pen's fiscal plan can win market confidence.

He said that if Le Pen can present an executable plan to stabilize debt without touching pension commitments, the credibility of her fiscal plan could be higher than the market expects. At the same time, however, if France reduces its financial support for the European Union in order to tighten domestic finances, it could also bring new pressure to fiscal coordination within Europe.

Protests Increase Resistance to Fiscal Austerity

As the French government pushes forward with budget cuts, it is also facing pressure from the streets.

According to The Wall Street Journal, nationwide student protests have continued to spread since last month, with more than 260,000 participants on Tuesday alone, including students, parents, and teachers, and hundreds of high schools blockaded. In some areas, protests escalated into violent clashes, with demonstrators burning trash bins, damaging bus stops, and throwing objects at police, who responded with batons and tear gas. French authorities said more than 200 students have been injured in the protests.

Protesters are demanding repairs to aging school buildings, smaller class sizes, and more teachers, while opposing the budget cuts proposed by Lescure. Although the government plans to increase education funding by 1.2 billion euros, it also intends to cut more than 1,500 teaching positions as student numbers decline.

On the political front, Le Pen called the government's budget plan "both ineffective and unfair," but when asked about the National Rally's negotiating red lines, she struck a relatively cautious tone. "The pressure from the bond market is already so great that we cannot set any more limits," she said at a press conference.

Left-wing leader Mélenchon criticized Le Pen's fiscal plan as a concession to financial markets, arguing that austerity measures could weaken the economy and further worsen public finances.

The head of G10 foreign exchange strategy at ING Bank said the euro's continued weakening against the U.S. dollar and other major currencies reflects the market's demand for a higher euro risk premium due to France's fiscal troubles.