French Prime Minister survives first vote of no confidence, French bond risk premium falls.

French Prime Minister Sebastien Le Cornu survived the first of two no-confidence votes on the 2026 budget on Friday, bringing the country one step closer to ending this period of political and financial turmoil. The motion launched by the far-left in the National Assembly only received support from 269 legislators, falling short of the 288 votes needed to overturn the government and veto the finance bill. This result indicates that Le Cornu's concessions on taxes and spending - especially those made to the center-left Socialist Party - have likely garnered enough support for him to successfully navigate subsequent no-confidence votes on his budget plan, including the second vote proposed by the far-right on Friday. This raises hopes that the complete budget will be approved in February, putting an end to the months of political brinksmanship and unpredictability that have plagued France. Before the vote, Le Cornu told legislators, "This bill is not the government's initial proposal, it is a bill born out of compromise, polishing, modifications, sometimes even at the cost of government concessions," "This is not anyone's bill, or rather, it is everyone's bill." Since the early election in 2024 left the National Assembly fragmented with no party holding a majority, France has been experiencing sporadic political turmoil. Le Cornu's two predecessors - Michel Banier and Francois Beru - were dismissed by legislators due to disputes over how to deal with the growing budget deficit (currently the largest in the eurozone). Post-election uncertainties pushed up bond yield spreads Financial markets have experienced sell-offs due to fiscal errors, government collapses, and threats of new elections, causing France's borrowing costs to rise relative to similar countries. Rating agencies have also downgraded the country's credit in response, with the central bank estimating that this uncertainty has dampened already weak economic growth. With progress made on the budget solution in France in recent weeks, tensions have eased. The yield spread between French 10-year bonds and more stable German bonds has narrowed to about 60 basis points, reaching the smallest closing spread since President Emmanuel Macron announced legislative elections in June 2024. The economy has also shown resilience, maintaining growth at the end of last year, with a significant rebound in manufacturing confidence at the beginning of 2026. To break the parliamentary deadlock, Le Cornu initially attempted to appease legislators by promising to pause Macron's pension reforms and avoiding using Article 49.3 of the Constitution (which bypasses parliamentary voting). Although this strategy successfully led to the passage of the social security bill in December last year, the government failed to garner majority support for the main budget bill. Last week, Le Cornu ultimately stated he would use Article 49.3, putting himself to the test of a no-confidence vote. The Socialist Party has become a "kingmaker," with enough seats to prevent opposition groups from forming an alliance to dismiss the prime minister. To win them over, Le Cornu introduced measures last week to increase wages for low-income earners, maintain taxes on big companies, and support education and students. "Since the country now demands a budget, and this budget is now acceptable, we will let it pass," socialist party member Laurent Baumel said in the National Assembly before the vote. The French government aims to reduce the deficit to 5% of GDP in 2026 After various compromises, the government currently expects this year's budget deficit to be 5% of economic output, compared to the initial target of 4.7%. The business community has sharply criticized this result, as Le Cornu has abandoned plans to reduce production taxes and extended a temporary tax on large companies of around 7.3 billion euros ($8.6 billion). "France is playing with fire," said Patrick Martin, head of the French Employers' Association (Medef), in an interview, "Large companies will have to make drastic choices, which will have consequences for investment and employment."