Germany’s Autumn of Reforms, Lecornu’s government survives in France and the twin rally in gold and equity

Recent announcements on investment, R&D and defense are positive but insufficient to turn the wheel on GDP growth, projected at just +0.1% in 2025 and long-term potential growth stuck at +0.4%. Deeper changes in labor, pensions and taxation are essential, alongside sustained momentum on the green transition, a strategic shift toward innovation, targeted investment and welfare state reform. Political consensus must drive the shift from consumption to investment we highlighted in previous research, and strengthen labor market incentives. But time is short as the legislative window closes by end-2026. In a realistic scenario, planned cuts to red tape, fiscal stimulus around defense and infrastructure and investment reform incentives such as the 30% super-depreciation until 2028, corporate tax cuts from 2028 and R&D incentives could bring an additional +1.2pp to GDP growth by 2026. Labor market incentives alongside real structural pension and income tax reforms, as well as climate renewables expansion and investments on top could bring growth up to +2.3pp by 2026 (optimistic scenario), and +2.7pps by 2029. But without decisive action, mobilizing capital, modernizing welfare systems and investing strategically, Germany might risk missing its best chance to reshape its economic future.

Prime Minister Sébastien Lecornu’s government narrowly survived a no-confidence vote, clearing the way for the 2026 budget debate. The budget bill relies on a mix of spending cuts (EUR 19.5bn) and tax hikes (EUR 9bn). Corporates will face a significant reduction in social contribution rebates, a move likely to hit low-wage sectors. Large corporates will see a halving of the corporate surtax though. The budget bill introduces a new tax on wealth-holding companies, though with a limited scope. Households face scaled back tax breaks and rebates. Defense spending, on the other hand, will rise significantly. The -4.7% of GDP deficit target for 2026 looks unlikely amid political fragmentation and the likely undershoot of revenue collection. The OAT-Bund spread is expected to trade around 70-90bps, while a dissolution could send it temporarily to 110bps. Market participants have welcomed the 2026 budget proposal in spite of the risks of fiscal slippages and the pension reform being suspended. Ratings agencies are likely to see an effective suspension as credit-negative, both because of direct and indirect costs through lower growth – we estimate the reform supported GDP growth by 0.2pp annually. French government bonds continue to trade in the high beta segment of the European government bonds market alongside Italy and Slovakia, despite their lower rating.