France's PM skirts another crisis and markets like it — but it comes at a price

Core Points - French Prime Minister Sebastien Lecornu has suspended a controversial pension reform, providing temporary relief to markets and avoiding a potential government collapse [1][2][5] - The suspension means the retirement age will remain at 62 until January 2028, which is a significant setback for President Emmanuel Macron's legacy [2][6] - The decision to suspend the reform is expected to cost France €400 million in 2026 and €1.8 billion in 2027, necessitating offsetting savings to avoid increasing the deficit [10][12] Economic Impact - The suspension of the pension reform is anticipated to have a limited short-term impact on France's fiscal outlook, but prolonged suspension could hinder debt and deficit reduction efforts [10][11] - France's public auditor estimates that a permanent suspension could cost public finances €20 billion annually by 2035, increasing public debt by 3-4 percentage points of GDP over the next decade [12] - The government aims for a budget deficit of 4.7% of GDP in 2026, down from 5.5% in 2025, while avoiding austerity measures [14][15] Market Reaction - Investors reacted positively to the news, with France's CAC 40 index rising by 2.5%, marking its largest daily gain since April, and the euro appreciating by 0.2% against the dollar [5] - Analysts suggest that investors should consider reducing exposure to long-dated French government bonds due to potential political shocks affecting broader European markets [16]