France's Pension Reform Pause Offers Markets a Breather

Key Takeaways:

• Pension reform pause allows the French government to avoid a potential political crisis.
• Financial markets react positively, but concerns about French public finances persist.
• The cost of suspending the reforms is significant, impacting debt and deficit reduction efforts.
• Analysts warn that prolonged postponement of reforms could have long-term negative effects on the French economy.

In a surprising move, French Prime Minister Gabriel Attal paused a controversial pension reform, providing some welcome breathing room for markets. The move appears to, at least temporarily, avert another government collapse.

The 2023 reforms were a key part of President Macron's political legacy, which would have raised the retirement age from 62 to 64.

Attal said in the National Assembly that “the retirement age will not be raised from now until January 2028.”

Attal offered the concession, and pledged not to force the budget through parliament, to win the support of the Socialist party ahead of a no-confidence vote against the government on Thursday. The center-right Les Republicains party has also indicated they won’t support motions put forward by far-left and far-right groups.

With the survival of Attal’s government now looking likely, this has reignited hopes of passing the 2026 cost-cutting budget aimed at addressing France’s deficit and debt woes.

Investors reacted positively to the prospect of France’s fifth prime minister in less than two years avoiding being ousted, with the French CAC 40 index jumping 2.5%, its biggest one-day gain since April.

The Cost of Concession

The price of scrapping the proposed pension reforms is steep, and it means France stepping back from what was viewed as a much-needed and overdue structural reform.

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 U.K.’s retirement age will rise from 66 to 67 in 2026, Germany’s is 65, and Italy’s is 67.

However, in France, resistance to changes to retirement age and contribution requirements is deeply entrenched, and Macron resorted to special constitutional powers in 2023 to force his pension reform plan through the lower house of parliament, angering MPs and sparking widespread protests and industry strikes.

Now his signature reform has been delayed, and analysts say it may be further weakened, impacting France’s fiscal outlook.

According to Attal, pausing 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 be at the expense of increasing the deficit.”

Economists at Goldman Sachs said the pension reform pause ahead of the 2027 presidential election has limited implications for the near-term fiscal outlook. If the pause were to persist beyond that, it could disrupt efforts to cut debt and deficit.

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

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

“As a result, over the next decade, French public debt will increase by an additional 3-4pp of GDP and stabilize close to 130% of GDP,” they said. France’s 2024 debt-to-GDP is 113%.

The Deficit Issue

The centrist government insists fiscal consolidation remains its core mission, and Attal said Tuesday that his target is for the 2026 budget deficit to be 4.7% of GDP, compared to 5.5% expected this year.

However, he insisted the budget wouldn’t be an austerity budget, and while not explicitly raising a wealth tax in his policy plan, Attal signaled he would seek a “one-off exceptional contribution on very large fortunes,” but didn’t provide further details.

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

“We expect France, already at a debt-to-GDP of 113% in 2024, to deteriorate by another 2-3pp per year in the medium term,” Panseri said in an analysis Wednesday, with UBS expecting the deficit to remain above 5% in 2026.

She added that investors with global 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 to the broader European markets.”

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