Both France and Germany – two of the EU’s key economic and political powerhouses – have recently undergone a period of political turmoil. As in much of Europe, numerous factors including perceived excessive levels of illegal migration, economic slowdowns and insufficient investment in public services, have seen a notable shift in public allegiance from the centre to the right. This has resulted in a fractured political landscape in both countries in recent months, leading to political paralysis and considerable policy uncertainty for international investors. While it appears some semblance of stability is now being restored, obstacles do remain, as French Premier Francois Bayrou and newly elected German Chancellor Friedrich Merz seek to govern whilst under growing pressure to satisfy a wide range of ideologies on the left and right. In this piece, Tris Puri, assesses the prognosis for political stability in both countries, as well as the potential short and longer-term impact for domestic companies and international investors.
Bayrou still not out of the woods
The political situation in France has been fractured in recent years, with no single party having held a parliamentary majority since 2022. However, the situation has deteriorated markedly since 2024. Following a poor result in parliamentary elections for President Macron’s centrist Ensemble movement, and significant losses to the far right National Rally in European elections, President Macron called for snap legislative elections, in which he hoped the French public would hand him a resounding mandate. In reality, Macron was left with a hung parliament, divided between three incompatible factions: the Ensemble coalition; Marine Le Pen’s far right National Rally, and the radical leftist New Popular Front.
In September 2024, Macron appointed former Brexit EU negotiator Michel Barnier as Prime Minister, with a mandate to reduce the deficit. Barnier’s tenure was short lived. His attempts to pass a controversial social security cuts bill by calling on Article 49.3 of the Constitution – allowing him to pass laws without parliamentary approval – drew the ire of the right and left, and led to his ousting following a no confidence vote in December 2024. Macron subsequently appointed Francois Bayrou, a longstanding political ally, as Prime Minister. Bayrou has faced similar obstacles, and has survived numerous no confidence votes brought by the right and left. In February 2025, Bayrou was finally successful in pushing through his budget. This budget calls for EUR 30 billion in spending cuts, EUR 20 billion in tax hikes, and aims to cut the deficit to 5.4 percent by the end of 2025.
The passing of the budget may have avoided the imminent collapse of yet another government, and has to some degree restored investor confidence in France, as evidenced by the re-stabilisation of French bond and equities markets. However, Bayrou’s position remains precarious. Parliament remains highly fragmented between competing factions, and Macron’s coalition remains weakened. Bayrou may therefore find himself in a state of paralysis in the coming months, and will potentially struggle to enact new legislation – especially legislation around contentious issues such as immigration and social services – in the face of incompatible demands from both ends of the political spectrum, and the lingering threat of further no confidence votes.
The passing of the budget may have avoided the imminent collapse of yet another government. However, Bayrou’s position remains precarious.”
As for the longer term political outlook, the recent banning of the right wing National Rally leader Marine Le Pen from running in the 2027 presidential elections may not be the saving grace many centrists and leftists had hoped for. The National Rally party was charged with illegally diverting over EUR 4 million into party coffers to supports its European Parliament delegation. While Le Pen can appeal her prison sentence and five-year ban from politics, many believe her chances of acquittal to be slim. Nonetheless, recent opinion polls indicate that Le Pen’s protégé, Jordan Bardella – who has announced he will be running in 2027 if Le Pen is unable to – may be just as, if not more popular, than Le Pen. The right wing is likely to remain a continual thorn in Bayrou’s side in the coming months and years, which may fuel doubts as to whether the country will be able to follow through with a range of policy ambitions in the longer-term, or will continue to be hampered by political in-fighting and changes in leadership.
Germany’s new Chancellor faces an uphill battle
Germany is also slowly emerging from its own political and economic quagmire, with Friedrich Merz having been voted in as Chancellor following a protracted period of political instability. Germany has faced several years of economic hardship, driven largely by tightening financial conditions, rising energy prices, a faltering manufacturing sector, and dwindling foreign demand for its exports from the likes of China. This has been compounded by an historic lack of public investment in infrastructure, shortages of skilled labour, and an ageing population.
Germany’s current political unsteadiness began in November 2024, when the coalition government of former Chancellor Olaf Scholz collapsed following a spat over spending reform plans and a no confidence vote in December 2024. Snap elections were held in February 2025 which saw Merz and his centre-right Christian Democratic Union (CDU) and its Bavarian sister party the Christian Social Union (CSU) emerge victorious – though lacking a majority. In an echo of events in France and many other European countries, the elections also saw the Alternative für Deutschland (AfD) party, a radical far right party, win its best ever result in a federal election, winning over all eastern German federal states.
Merz has voiced his intentions to restore Germany to being a leading economic and political player in Europe. However, his path to the Chancellorship has been far from simple. Firstly, as the CDU/CSU failed to secure 50 percent of the vote, they were required to form a coalition with the centre-left Social Democratic Party (SPD). This coalition was formally agreed last month, despite some resistance from the youth wing of the SPD and inter-party jostling around key policies. With a coalition in place, many had expected Merz to face minimal opposition from the Bundestag when it came to voting him in as Chancellor. However, on 6th May, for the first time in German history, Merz failed to secure the absolute majority required to become Chancellor, receiving only 310 votes of the 316 required. Fortunately for Merz, he was able to secure a slim majority in the second round of voting, with 325 votes.
Merz has voiced his intentions to restore Germany to being a leading economic and political player in Europe. However, his path to the Chancellorship has been far from simple.”
Since the voting is anonymous, it is difficult to draw definitive conclusions from these votes. However, given that Merz’s own coalition has 328 members, this may indicate that in the first round of voting, some of his coalition did not vote for him, or abstained from voting altogether – and the same may be true in the second round. With the AfD already claiming that this historic first round failure is a signal of lack of confidence in Merz’s leadership, these voting figures beg the question whether Merz will have the required support going forward to push through legislation, especially if some members of his own coalition may not fully support him.
While Merz will likely be able to rely on support from the coalition and the Green party when it comes to pushing through certain agendas such as renewable energy initiatives, other policies pose a bigger challenge and risk driving a wedge between the coalition. The most problematic of these will be immigration policy. In an effort to placate more hard line elements within his own party, as well as the increasingly popular AfD, Merz has previously indicated his willingness to engage productively with the AfD on immigration policy, drawing criticisms from the SPD. German intelligence services recently attempted to designate the AfD as a right-wing extremist group, owing to its alleged undermining of democracy in Germany. While the intelligence services have been forced to temporarily withdraw this designation, pending a legal dispute with the AfD, these events nonetheless will make any perceived collaboration between the CDU/CSU and the AFD harder for Merz to justify to coalition partners.
Despite these many obstacles, Merz has recently secured a major political victory, with his proposed budget having been voted through parliament and the Bundesrat in March. Merz’s budget calls for a significant boost in spending on defence and intelligence, as well as the creation of a EUR 500 billion infrastructure fund to target transport, energy, hospitals, schools and digital transformation over the next decade. Most notably, Merz has stated his intentions to reform Germany’s ‘debt brake’. This is a constitutional provision in Germany established in 2009 at the height of the financial crisis, which tightly restricts the German government’s ability to borrow money. Many have argued that the debt brake has been a major hindrance to Germany’s ability to invest in infrastructure, and key social services, and Merz views the reforming of the brake as a key step in restoring Germany’s economic dominance on the continent.
What a Merz chancellorship may mean for business and investment in Germany remains slightly speculative. While Merz and the CDU/CSU have made various pledges, whether there will be sufficient political consensus to make these a reality is another question, and it is likely that significant concessions will need to be made, on both sides on key policies. That said, at a broad level, Merz’s budget signals large-scale investments in domestic infrastructure. He has also strongly indicated he intends to foster a more business friendly environment by lowering corporate taxes to 25 percent, and cutting regulatory and bureaucratic red tape. More specifically, Merz has spoken of the need to prioritise digitisation and tech innovation in Germany, including through the establishment of a new Ministry of Digitisation. The CDU/CSU has also been emphatic that it will not backtrack on the progress Germany has made to date in the green transition, and signalled a potential return to nuclear energy, as well as increased investment in renewables.
Both France and Germany are far from settled politically and further political in-fighting can be expected in the short- to medium-term, which may in turn lead to further policy and legislative uncertainty. S-RM has extensive experience advising clients in France and Germany and will continue to monitor developments in both countries carefully.
