France has run the biggest fiscal deficit in Europe, and the government has struggled to rein in spending. However the French economy also has strengths that may help it outperform its neighbors as Europe boosts military spending and the continent faces the uncertainty of US tariffs, according to Goldman Sachs Research.
France’s GDP is forecast by our economists to expand 0.5% this year, compared with no growth in Germany and 0.8% for the euro area as a whole.
We spoke with Alexandre Stott, a European economist in Goldman Sachs Research, about the outlook for France amid elevated budget deficits, increased military spending, and the uncertainty from trade and tariff tensions with the US.
What is the outlook for the French economy?
We see little growth in France this year, in fact less than in the rest of Europe. That’s because the economy is facing two major headwinds: trade tensions from abroad and deficit reduction at home.
But some selective aspects of the French economy look attractive.
First, Europe is increasing its military spending — Germany in particular. Where are they going to buy that equipment? A good part is likely to come from France, which has the largest defense industry in the region and is the second-largest military goods exporter behind the US. French industry would stand to benefit from a consolidation of the European military complex and is well positioned to provide key pieces of military equipment such as air defense systems and satellites, some of the things Europe needs most.
Second, France is likely to be more shielded from an escalation of global trade tensions relative to its European peers. It’s a less open country and is less exposed to the US. So even if trade tensions are negative for Europe as a whole, on a relative basis, France won’t be hit as hard as Germany, which is very open, or Italy, which is quite exposed through its manufacturing sector. As a result, France may be more shielded from the global trade tensions.
Lastly, France is an economy rich in human capital. By that I mean that it’s home to some of the world’s leading universities, from which a lot of engineers graduate and conduct cutting-edge research. That’s why France is one of the countries in Europe with the most innovation and the most startups, for example in areas like artificial intelligence. You may not always see these influences at the aggregate macro level, but it may be possible to invest in these areas with the right strategies, in a specific asset class or sector.
How might France be affected under different tariff scenarios?
The tariff and trade outlook remains very uncertain. First, there’s what will be decided in the White House, meaning the size of the tariffs and what they cover. It seems to us like the US tariffs on certain goods — such as autos, aluminum, and steel — are here to stay. What’s not known is whether we will see a very broad tariff on Europe or remain at a 10% tariff or get to a full trade deal. Still, we think the risks are now a bit more symmetric, judging from recent communications out of the US.
There will also be second-round effects. Uncertainty around trade policy will remain high, global growth is likely to slow, and financial conditions are now tighter. This should not affect France more than others, but it will still be negative for the economy. It’s one of the key reasons why our growth forecast is below consensus and government expectations.
Why is the fiscal outlook such a concern for the French economy?
France’s deficit is very large on a historical basis and compared to its peers. Last year, it was the largest deficit in the euro area. But we’re seeing signs of improvement. The government had been expecting a deficit of around 6% of GDP, and it was 5.8%. It’s not a big improvement, but it comes on the back of two years of negative surprises — so a more encouraging direction.
A second sign of improvement is the government showing greater commitment to its deficit target. What you saw last year was a target being announced, and then some slippage, and the government revising the deficit target higher and higher. This year, the government is showing stronger resolve than I expected. That’s a positive, and I’m now more confident that the deficit will decrease this year.
Why are deficits so important to the outlook?
The deficit is the main economic variable that the government controls. But if you run a deficit year after year, it accumulates into debt, especially when growth is low and interest rates are high. Investors don’t want to see debt relative to the country’s GDP move upward consistently. They typically want the debt ratio to be stable or falling. That would mean the country is on track to eventually repay its debt and meet its obligations.
I often get asked why France’s deficit is problematic, given the US also has very large deficits. First, growth tends to be lower in France, and that makes it easier for deficits to snowball into debt. Another important difference is that the US has the dollar, whereas France does not benefit from having the global reserve currency. On top of that, France doesn’t have independent monetary policy. The country is tied together with other countries to the euro and the European Central Bank. That’s why European countries follow self-imposed rules on how to conduct public finances, that focus on keeping debt low or stable. But France, with its large and increasing debt, clearly stands out.
Which means the government’s options are limited?
Deficits should increase in a recession or when growth is slowing. But equally, they should fall back when the economy improves. Countries across the euro region ran very high deficits in 2020 and 2021, during Covid, and then the countries that were hardest hit by the energy crisis in 2022 and 2023 again ran very large deficits. But since then, they’ve really started to reduce them, southern European countries in particular.
France has really stood out in that its deficit didn’t decrease — it even increased in 2024 — and its progress relative to other countries has been much slower. This means France now has very little fiscal space left, which is an issue when you face growth headwinds in the form of tariffs or pressure to spend on other strategic items like defense.
What does this mean, overall, for investors considering France right now?
The growth outlook in France is fairly weak, and that’s an issue France partly shares with other European countries. From a fiscal position, the country is finally starting to reduce its deficit, but I think the journey will be long and will unfold slowly. Investors should understand that the macroeconomic backdrop will remain challenging over the next couple of years. But some of that is already reflected in market prices.
Does the possibility of elections later this year affect the fiscal outlook?
The risk with elections is that the government cannot focus on maintaining its deficit target. It becomes concerned with running for election and presenting a political platform. Officials get shuffled in and out of government. And this typically leads to fiscal slippage. In fact, it’s one of the key reasons why the deficit last year was so large. We could find ourselves in a similar situation if we were to have snap elections, and the soonest that could occur would be in the second half of this year.
How do the strengths and weaknesses in the French outlook balance out?
The key challenge in France is a large fiscal imbalance, and progress on that is made very difficult by the fact that we are facing a political deadlock.
France’s key strength lies in its diversified economy, which means it tends to give more stable returns over the economic cycle. It is also really well positioned on some of today’s most important issues, like re-militarization, and less exposed to structural headwinds, like global trade. Last but not least, France is one of the places in Europe where investors can gain exposure to new talents, new ideas, and new technologies