France has recently put forward a series of deficit reduction proposals in an attempt to reverse its deteriorating fiscal position, providing temporary relief to pressure on the French bond market.

The yield on France's 10-year government bonds fell by about 12 basis points on Tuesday to around 4.75%, and the spread with German bonds of the same maturity also narrowed.

The French government plans to bring next year's deficit ratio within 5% of GDP through measures such as cutting spending and controlling pension expenses; Le Pen's National Rally has proposed a "shadow budget" that would cut more than 140 billion euros in spending, reduce next year's deficit ratio to 3.7%, and further bring it down to 2.2% by 2032.

However, whether these proposals can truly be implemented still faces significant obstacles. The government may need to invoke Article 49.3 of the constitution to bypass parliament to push through the budget, while also facing parliamentary opposition and escalating street protests; Le Pen's plan is merely a policy vision for after her party comes to power, and its implementation would still require support from other political parties.

French government prepared to use constitutional tools to cut spending

According to The Wall Street Journal, French Finance Minister Roland Lescure stated that the government is willing to negotiate on the budget content but has two red lines: keeping the budget deficit ratio within 5% of GDP and avoiding measures that harm economic growth.

If parliamentary negotiations reach a deadlock, the government is prepared to invoke Article 49.3 of the French constitution to bypass the National Assembly and directly push through a spending reduction plan totaling approximately 43 billion euros (about 48 billion US dollars).

"We will use any means necessary," Lescure said.

Article 49.3 allows the government to advance legislation without a final parliamentary vote, but lawmakers can counter by filing a no-confidence motion. If the motion passes, the government would be forced to step down, and the budget bill would collapse with it.

Lescure stated that even if the government judges that it cannot survive a no-confidence vote, it can still advance the budget through a series of executive orders 70 days after the budget bill is submitted, before a final vote is held.

"This is a guardrail," he said. "There is always a backup plan."

Pensions are one of the main points of contention in the budget negotiations. Lescure proposed reducing the inflation-linked adjustment of pensions and pointed out that pension spending grew by 5.4% in 2024, an increase of about 15 billion euros. Without taking measures, pension spending is expected to increase by another 15 billion euros next year.

Lescure also revealed that special provisions have been added to the budget allowing the winner of next spring's general election to revoke certain budget measures, including pension-related provisions, in exchange for limited support from Le Pen's and Jean-Luc Mélenchon's camps.

Le Pen proposes a more aggressive "shadow budget"

Compared with the government, Le Pen's fiscal consolidation plan is more aggressive. She plans to cut more than 140 billion euros in spending, reduce next year's deficit ratio to 3.7% of GDP, lower than the government's 5% target, and further reduce it to 2.2% by 2032.

Specific measures include compressing domestic spending, reducing transfers to the EU, and cutting immigration-related expenditure.

UBS market analyst Nana Antiedu said that after Le Pen unveiled her "shadow budget," French government bonds continued to outperform, with the 10-year OAT yield falling 12 basis points to 4.74%.

However, she also noted that this is still only a shadow budget, representing the policy intentions of Le Pen's party if it comes to power in the future.

Even if the National Rally wins the 2027 presidential election in the future and completes the relevant legal procedures, reducing the deficit ratio below 3% by 2032 would still require support from other political parties.

Rich Privorotsky, head of Goldman Sachs' trading desk, believes that the OAT market has already priced in a lot of positive news in advance, so there is limited room for further improvement. The key lies in whether Le Pen's fiscal plan can gain market trust.

He stated that if Le Pen can propose an executable plan to stabilize debt without touching pension commitments, the credibility of her fiscal plan may be higher than market expectations.

At the same time, however, if France reduces its financial support to the EU in order to tighten domestic finances, it could also bring new pressure to fiscal coordination within Europe.

Protests increase resistance to fiscal tightening

While the French government pushes forward with budget cuts, it also faces pressure from the streets. According to The Wall Street Journal, nationwide student protests have continued to spread since last month, with more than 260,000 participants on Tuesday alone, including students, parents, and teachers, and hundreds of high schools blocked.

In some areas, protests escalated into violent clashes, with demonstrators burning trash bins, damaging bus stops, and throwing objects at police, who responded with batons and tear gas. French authorities said more than 200 students have been injured in the protests.

Protesters are demanding repairs to old school buildings, smaller class sizes, and more teachers, while opposing Lescure's proposed budget cuts. Although the government plans to increase education funding by 1.2 billion euros, it also intends to cut more than 1,500 teaching positions as student numbers decline.

On the political level, Le Pen called the government's budget plan "both ineffective and unfair," but when asked about the National Rally's negotiating red lines, she was relatively cautious.

"The pressure from the bond market is already so great that we cannot set any more restrictions," she said at a press conference.

Left-wing leader Mélenchon criticized Le Pen's fiscal plan for compromising with financial markets, arguing that austerity measures could weaken the economy and further worsen public finances.

The head of G10 foreign exchange strategy at ING Bank said that the euro has continued to weaken against the US dollar and other major currencies, reflecting the market's demand for a higher euro risk premium due to France's fiscal difficulties.