The decision by French Prime Minister Élisabeth Borne to suspend a controversial pension reform has offered markets a welcome respite on Wednesday, seemingly avoiding another government collapse—for now.

The 2023 reform was a crucial part of President Emmanuel Macron's political legacy, which aimed to raise the retirement age from 62 to 64. Borne announced in the National Assembly on Tuesday that “the retirement age will not be increased from now until January 2028.”

Borne proposed this concession and promised not to push the budget through Parliament unilaterally in a bid to gain support from the Socialist Party before the no-confidence vote against the government on Thursday. The center-right Republican Party of France also stated they would not support motions proposed by far-left and far-right factions.

With Borne’s government now appearing more stable, hopes have been reignited for a budget aimed at addressing France's deficit and debt issues, set for cost-cutting in 2026. Investors responded positively to the prospect of France’s fifth prime minister in less than two years avoiding removal, with the CAC 40 index rising 2.5%, marking its largest single-day gain since April.

The Cost of Concessions The proposed cancellation of the pension reform comes at a significant cost, indicating a retreat for France on what has been seen as a necessary and overdue structural reform. France's current retirement age of 62 and the proposed increase to 64—requiring retirees to work at least 43 years—are far below the standards of many other European countries; for instance, the UK will increase its retirement age from 66 to 67 by 2026, Germany has it at 65, and Italy at 67.

However, resistance to changing retirement age and contribution requirements is deeply rooted in France. In 2023, Macron invoked special constitutional powers to push his pension reform plan through the lower house of Parliament, which angered lawmakers and sparked widespread protests and strikes.

Now that his signature reform is postponed, analysts suggest it could be further diluted, impacting France's fiscal outlook. According to Borne, the pause in the unpopular pension reform is expected to cost €400 million ($465 million) in 2026 and €1.8 billion in 2027. She noted that these costs “will need to be offset through savings” and “cannot come at the expense of increasing the deficit.”

Goldman Sachs economists indicated that the suspension of pension reform before the 2027 presidential election would have a limited impact on recent fiscal outlooks. If the suspension extends beyond that point, it could disrupt efforts to manage debt and deficit reduction.

“If the retirement age and years of contributions continue to rise as currently proposed beyond 2027... medium-term costs will remain manageable. However, the risks may lean toward a longer suspension (especially in light of next year's presidential election where pension reform will still be a contentious issue), which would have more significant impacts on the outlook,” they stated in an email analysis on Wednesday.

France's independent public audit institution estimates that permanently suspending pension reform could result in an annual public finance cost of €20 billion (0.5% of GDP) by 2035.

“Consequently, over the next decade, France's public debt could rise by an additional 3-4 percentage points of GDP, stabilizing at nearly 130% of GDP,” they noted. The debt-to-GDP ratio for France in 2024 is projected to be 113%.

Deficit Concerns The centrist government insists that fiscal consolidation remains a core objective, with Borne stating her aim is for the budget deficit to account for 4.7% of GDP by 2026, down from an expected 5.5% this year.

However, she emphasized that the budget would not be austerity-focused. Although she did not specifically mention a wealth tax in her policy plans, Borne hinted at seeking a “one-time special contribution from substantial wealth,” without providing further details.

Claudia Panseri, chief investment officer at UBS France, stated that even if the government can pass its budget for 2026, the country’s fiscal situation is unlikely to show significant improvement.

“We expect France to reach a 113% debt-to-GDP ratio in 2024, deteriorating by another 2-3 percentage points annually in the medium term,” Panseri noted in an analysis on Wednesday, forecasting the deficit to remain above 5% in 2026.

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

Panseri stated that shorter-term French bonds are less sensitive to debt concerns and provide a solid yield given their low default risk.