French Pension Reform Pause: Market Relief or Fiscal Retreat?

French Pension Reform Pause: Market Relief or Fiscal Retreat?

French Prime Minister Gabriel Attal's decision to suspend a controversial pension reform provided some welcome respite for markets on Wednesday. The move appears to have, at least temporarily, averted yet another government collapse.

The 2023 reform, a key part of President Macron’s political legacy, would have raised the retirement age from 62 to 64. “There will be no increase in the retirement age between now and January 2028,” Attal said as he presented his government’s policy roadmap to parliament on Tuesday.

Attal offered the concession, and a pledge not to ram the budget through parliament, to secure the support of the Socialist Party ahead of a no-confidence vote in the government on Thursday. The center-right French Republicans have also announced that they would not support the motion put forward by far-left and far-right groups.

With the survival of Attal’s government now looking more likely, this has reignited hopes of passing the 2026 cost-cutting budget aimed at addressing France’s deficit and debt problems. Investors reacted positively to the prospect of France avoiding the ouster of its fifth prime minister in less than two years, with the French CAC 40 index rising 2.5%, its biggest single-day gain since April.

The Cost of Concession

The proposed reversal of pension reform comes at a hefty price, and also means France is backtracking on a structural reform seen as much needed and long overdue. France’s retirement age of 62, and the proposal to raise it to 64 (and require retirees to have worked for at least 43 years) is well below the standard in many other European countries; for example, the UK retirement age will rise from 66 to 67 in 2026, Germany is 65, and Italy is 67.

However, in France, resistance to changing retirement ages and contribution requirements runs deep. Macron resorted to special constitutional powers to force his pension reform plan through the lower house of parliament in 2023, angering lawmakers and sparking widespread protests and sector strikes.

Now, his signature reform has been put on hold, and analysts say it is likely to be further watered down, impacting France’s fiscal outlook.

According to Attal, suspending the unpopular pension reform is expected to cost €400 million ($465 million) in 2026, and €1.8 billion in 2027. He said these costs “will need to be offset by savings” and “cannot come at the expense of increasing the deficit.”

Economists at Goldman Sachs said the pause to pension reform ahead of the 2027 presidential election has limited impact on the near-term fiscal outlook. If the pause lasts beyond that, it could disrupt efforts to reduce debt and deficits.

“If retirement ages and contribution years continue to increase after 2027 as currently proposed… the medium-term costs would also remain contained. But risks might be skewed toward a longer pause (especially ahead of the 2027 presidential election, where pension reform remains a contentious topic), which would have a more material impact on the outlook,” they said in an email analysis on Wednesday.

France’s independent public audit body estimates that the permanent annual cost of suspending pension reform to public finances would reach €20 billion per year (0.5% of GDP) by 2035.

“Therefore, over the next decade, French public debt would increase by an additional 3-4 percentage points of GDP, and stabilize close to 130% of GDP,” they said. France’s debt to GDP ratio was 113% in 2024.

The Deficit Problem

The centrist government insists that fiscal consolidation remains its core task, and Attal said on Tuesday that his target is for the budget deficit to be 4.7% of GDP in 2026, down from a projected 5.5% this year.

However, he insisted the budget would not be an austerity budget, and while not explicitly putting forward a wealth tax in his policy plan, Attal hinted that he would seek “a one-off exceptional contribution from large fortunes,” but gave no further details.

Claudia Panseri, chief investment officer for UBS in France, said that even if the government manages to pass the 2026 budget, France’s fiscal situation is unlikely to improve significantly.

“We expect that France has already reached a debt-to-GDP ratio of 113% in 2024, and that it will deteriorate by another 2-3 percentage points per year in the medium term,” Panseri said in an analysis on Wednesday, UBS expects the deficit to remain above 5% in 2026.

She added that investors with global investment portfolios should consider reducing their exposure to long-duration French government bonds, and closely monitor developments, “as political shocks in France could have spillover effects for wider European markets.”

Shorter-dated French bonds are less sensitive to debt concerns and provide a good level of yield for their low default risk, Panseri said.