France’s latest budget crisis poses risk to defense investment pledges
The latest clash between French lawmakers over reducing the country’s hefty public deficit could see its defense spending pledges fall to the wayside, analysts say. That would come as a blow to the likes of Thales , Dassault Aviation , Safran and Leonardo -owned MBDA — domestic defense players that have rallied this year on an expected boost in regional funding. French President Emmanuel Macron has stressed the need to “reindustrialize” the country’s regions, and for spending to be concentrated within Europe rather than the U.S. or elsewhere as the continent pursues “strategic autonomy.” A struggle to pass France’s annual budget currently risks toppling the country’s government for the second year running . Prime Minister Francois Bayrou has proposed cutting the 2026 budget by around 44 billion euros ($51 billion) via measures including public spending cuts and freezes on pensions, welfare and tax brackets, as well as reducing the number of public holidays . Bayrou has insisted that sacrifices are needed to secure France’s future and reduce its dependence on debt. On Monday he called a parliamentary confidence vote in his administration for Sept. 8 — one in which the odds are stacked against him. If Bayrou’s minority government collapses, Macron may nominate another prime minister, likely to be a centrist who will face a similar struggle to pass a budget. Macron could alternatively call a snap election, which could result in another hung parliament or in victory for either the far-right National Rally or a left-wing coalition. The fresh instability dampened French stock markets on Tuesday, with the CAC 40 index closing 1.6% lower as French long-term borrowing costs rose. French bond yields have risen significantly in recent years amid political division and a lack of consensus over measures to cut the deficit ratio, currently at 5.8%. French economic growth, already tepid, has been further weakened this year by the impact and uncertainty from U.S. tariffs, Ana Boata, head of economics research at Allianz Trade, told CNBC’s “Europe Early Edition” on Wednesday. The various paths ahead, including further deadlocks or a special law being used to enable government spending to continue, are likely to deliver at most around half the consolidation needed to meet its deficit reduction targets, she said. The tightness of France’s fiscal position is a risk to its ability to meet the agreement struck by NATO allies in June to increase defense spending from 2% to 5% of gross domestic product by 2035, Boata continued. “We did not yet have a clear plan on how France plans to spend these additional points of GDP commitments to NATO,” Boata said. France, the world’s second-largest arms exporter, is one of the countries best-positioned to capitalize on higher European defense spending. However, it is also unclear what orders it may get from other countries in the decade ahead, Boata continued — making it hard to tell what kinds of benefits it will see at large. Not a political priority “I was already sceptical before that France would follow through and actually raise defense spending as announced by President Macron in the years ahead,” Salomon Fiedler, economist at Berenberg, told CNBC. “With the recent political developments in France, including Prime Minister Bayrou calling for a confidence vote himself, the risk is now even higher that France will not be able to proceed along an at least somewhat controlled path towards fiscal consolidation.” “In this situation, I do not think it is a political priority for any of the camps in parliament to push for additional defense expenditures,” he noted. European pledge France is far from the only country whose defense spending pledges have driven the European market rally this year. As well as national commitments, the European Union plans to spend billions more to support investments in both defense and space across its next seven-year budget starting in 2028. However, investors such as Stephen Yiu, manager of the Blue Whale Growth Fund, have already begun to question whether the “easy money” has already been made in the sector this year. In a note earlier this month, investment management firm VanEck said there was “some doubt as to whether European countries can meet [NATO] targets due to their already stretched public finances.” VanEck’s Dmitrii Ponomarev wrote that only Germany appeared to have the required fiscal headroom, while other big economies including France, the U.K. and Italy are all grappling with debt-to-GDP ratios of near-to or above 100%. “That has led to fears of ‘defense washing’, where governments are presenting unrealistic plans for future military spending or trying to allocate some rather unrelated projects to their defense budgets,” Ponomarev said. Sandeep Rao, senior researcher at Leverage Shares, meanwhile flagged U.S. expectations for the EU to increase its defense purchases stateside in the coming years following the trade agreement between the partners. “It’s likely that the EU will have to further favour buy-ins of American weapons stockpiles at their expense and at a cost to Europe’s industrial base,” Rao told CNBC. “This is separate from sub-categories of military spending where U.S. companies’ involvement was already heavy and even favoured, such as with combat aircraft.” “A wave of consolidations as well as increased stake buy-ins by American defense companies can be expected to take place across Europe.”
[title_words_as_hashtags
