France's Budget Deficit Narrows as Villeroy Calls for 'Credibility'

France's budget deficit narrowed slightly from January to November last year as the government cut expenditures. 

The budget deficit dropped to €172.5 billion for the 11-month period, down from €197.97 billion in the corresponding period of the previous year, data from the Ministry of Economy and Finance showed on Tuesday. Total revenue rose 5% year-on-year to €312.04 billion, while expenditures dropped 2.4% to €462.06 billion.

French budget deficit (€), source: TradingEconomics

The French government has struggled to regain fiscal stability as the country grapples with a budget deficit projected to account for 6.1% of the country's GDP in2024, more than double the 3% deficit ratio limit required in the European Union (EU). 

The government collapsed in December following months of contentious debate over Prime Minister Michel Barnier's budget proposals to curb France's mounting debt through tax hikes and spending cuts. The political turmoil in France has raised concerns about President Emmanuel Macron's grip on power, who plans to serve the rest of his term until 2027. 

Macron named in December centrist ally Francois Bayrou as his fourth prime minister to avoid a looming financial crisis, following the resignation of Barnier after a vote of no-confidence last month.

France's national debt is forecast at 115% of GDP this year, compared with 112.7% last year. The Organization for Economic Co-operation and Development expects GDP growth in France to deteriorate to 0.9% in 2025 from 1.1% in 2024.

Villeroy Calls for Budget Deficit Credibility

With political instability rocking Europe’s second-largest economy, the Governor of the Central Bank of France, Francois Villeroy de Galhau, has called on the government to restore "credibility" around its fiscal management. 

"The first significant step towards credibility must be taken in 2025," Villeroy said on January 8. "We must return this year to a deficit as close as possible to 5% of GDP, and clearly below 5.5%. We also need to set a medium-term target of a 3% deficit in 2029."

French budget deficit (%), source: TradingEconomics

The 2029 target "aligns with our European commitments, but most importantly, it also corresponds to the level that will finally enable us to stabilize our debt ratio," Villeroy said. The government should incorporate "targeted tax rises" and "controlled and more efficient spending," he added. 

Without action to reduce government spending, Villeroy warned that France would have the highest deficit in the euro area. It "remains among the few countries whose debt ratio continues to rise," he said.  

France's Budget Deficit Increases Risk Premium

France's debt cost has increased, reflecting the risk premium mandated by market participants. While French bonds typically traded closer to German Bunds, that has recently changed.

At the start of 2024, they traded at 2.58%, 50 basis points above the German 2.08% and well below the Italian 3.67%. At the start of 2025, the situation was materially different, as the spread narrowed, with French bonds rising as high as 3.24%, a notch below Italy's 3.57%.

French 10-year vs. German 10-year vs. Italian 10-year bond, Source: TradingView

"Our bond yields have moved perilously away from Germany’s and closer to Italy’s," he said. "The interest burden will soon exceed the budget for the Ministry of Education." 

France's new Finance Minister, Eric Lombard, is presently working to reconfigure the 2025 national budget. A new budget aims to generate €50 billion through tax increases and spending cuts, less than Barnier’s €60 million target. 

Finance Minister Plans Budget Deficit Talks

Lombard plans to meet with opposition leaders in an effort to craft a budget that will withstand any potential challenges. Lombard, along with Bayrou, wants to win over political actors who refused to accept the budget presented by the previous government.

He warned, though, in an interview with France Inter that he wouldn’t categorize the consultations as negotiations – stressing that he was ready to contest demands made by political opponents.

“If we negotiate with everyone then we will once again end up in a situation where there aren’t any possible solutions," Lombard said. "We will listen, we will take points on board, we’ll draw up a plan, and we’ll present this to the parties."

In mid-December, France’s senate adopted an emergency bill to ensure that a minimum level of services could be maintained during an interim period.

French Inflation Fell More ‘Than Expected'

On the upside, French e inflation fell "by even more than expected" and across the euro area has moved back towards our 2% target, to 2.4% at end-2024, Villeroy said. The latest data from France, though, shows a slight uptick in the EU-harmonized annual inflation rate.

It increased to 1.8% in December 2024 from 1.7% in November, in line with the preliminary estimate, the country's national statistics office, INSEE, said on Wednesday. 

"Our country has overcome the acute illness of inflation; the chronic illness of our public finances remains," Villeroy said on January 8. "The disease is very old, but there is no reason to become accustomed to it."

Villeroy said on Wednesday that the European Central Bank should continue to cut interest rates to reach 2% by the summer "as the battle against inflation is practically won."

"If the retreat of inflation is confirmed in the coming quarters as we forecast, it makes sense to go toward this 2% rate by next summer without slowing the pace," Villeroy said at the finance committee hearing at France's Senate.

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