The Middle East conflict escalation constrains France's economic growth

Ask AI · Why is the French economy so sensitive to Middle East energy fluctuations?

Shown is a gas station in Lille, France. (Xinhua News Agency photo)

The military strikes launched by the United States and Israel against Iran, now for more than a month, have continued to exert spillover effects on the French economy. The knock-on chain reactions—such as inflation surging due to rising energy prices, costs increasing, and spending expanding—have effectively led France, the EU’s second-largest economy, to “foot the bill” for this Middle East geopolitical conflict. They also, from another angle, reflect France’s deep-seated long-standing ailments, including long-weakened economic momentum, fiscal rigidity, and industrial hollowing-out.

The increase in energy prices triggered by the conflict between the U.S., Israel, and Iran has directly hit the French economy. Data recently released by the National Institute of Statistics and Economic Studies of France shows that, affected by developments in the Middle East situation, France’s inflation rate rose from 0.9% in February to 1.7% in March. Of this, energy prices were up 7.3% year on year, becoming the core driving force behind the rise in inflation. In this regard, Dorian Roucher, head of the economic forecasting division at INSEE, said that the international environment has undergone a major change. The continued surge in natural gas and oil prices will push France’s inflation rate to around 2%, and through price fluctuations it will directly impact the French economy. At the same time, the intense volatility in energy prices also has a negative “emergency brake” effect on France’s economic growth. The latest economic forecast released by the Banque de France shows that France’s gross domestic product (GDP) will grow by 0.9% in 2026, a slight downward revision from the 1% growth predicted in December last year. In this regard, economists from institutions such as ING assess that the relevant data already reflects that the first-round inflation shock has begun to show itself, and that the recovery momentum that is already fragile in France is being quickly consumed.

The U.S.-Israel-Iran conflict has sharply raised the cost of living for people in France. According to a survey by French business organizations, affected by the Middle East conflict, French diesel prices have risen by more than 20% compared with before, and gasoline prices have increased by more than 11%. Meanwhile, due to the “lagged transmission” effect of energy prices, increases in French natural gas prices are unavoidable. Emmanuelle Wargon, chair of the French energy regulator, said that because France relies on imports for 95% of its natural gas, and considering transmission cycle factors, it is expected that natural gas prices for French residents will rise by 15% in May. In addition, although current inflation is mainly reflected in the energy sector, increases in production and transportation costs will gradually spill over into broader consumer areas such as food and industrial goods. This also objectively confirms a trend shown in data released by France’s statistical agency: the three major pillars that support household consumption—food, energy, and manufactured goods—are collectively declining. In this regard, French Finance Minister Lescureur warned that if this energy shock lasts for more than a few weeks, the crisis will spread to all areas of the economy and ultimately evolve into a more systemic crisis.

Compared with the inflation surge and economic downturn caused by geopolitical conflict, France’s debt predicament is even more apparent, and the country faces a difficult balancing act between expanding intervention and optimizing deficit reduction. Data released by INSEE show that, as of the end of 2025, the size of France’s public debt had reached 3.46 trillion euros, up by 154.4 billion euros from the same period in 2024. The ratio of public debt to GDP was 115.6%, higher than 112.6% in 2024. The fiscal deficit’s share of GDP reached 5.1%, narrowing somewhat from before. In response, French Prime Minister Lecorne pointed out that geopolitical conflict will affect France’s debt, and the government will continue to cautiously advance related policies, aiming to bring the deficit’s share of GDP down to below 5% in 2026. But some French economists also analyze that the slight decline in France’s deficit in 2025 is not due to austerity; more of it comes from increasing revenue in areas such as mandatory tax hikes. However, these “stopgap” measures will be difficult to sustain under a geopolitical shock. In particular, the government is facing multiple expenditure projects, including strengthening price regulation in the energy sector, capping distribution coordination, smoothing prices, and providing targeted support with assistance at specific locations, which will keep constraining the space for subsequent policies.

With the current French economy continuing to face pressure as geopolitical shocks persist, the French economics community is more often examining the country’s longstanding maladies from deeper layers such as momentum and production. They believe the root cause still lies in the “structural anemia” within the economic body. First is the fragility of industrial hollowing-out. France once had a solid industrial foundation, but amid waves of deindustrialization, the hollowing-out of the economic structure has become prominent: the share of its manufacturing industry in GDP has continued to decline, and it has placed France in the lagging tier in Europe, causing France to lose the resilience to withstand external shocks through strong endogenous growth driven by manufacturing. Forced into the role of a “harvested party” for energy costs. Second is the fragility of fiscal sustainability. Faced with years of accumulated large-scale debt, France’s fiscal room has continued to be suppressed. It has become a core issue several times that interrupts the continuity of government governance and triggers bargaining among different political parties, forming a vicious cycle of “high welfare—high taxes—high debt.” This also means that when facing crises, the government lacks strong fiscal levers. Third is the fragility of purchasing power support. As inflation rises, the actual living pressure on people in France will increase in tandem. In particular, with cost increases in rigid spending areas such as food, energy, and housing, combined with lagging wage growth, the effect of boosting consumption—which is an important pillar of economic growth—will be severely weakened, continuously undermining consumer confidence. According to statistics, in March France’s consumer confidence index was 89, below the long-term average level, increasing the risk that short-term economic fluctuations will be amplified into a long-term social crisis.

At present, the spillover shock brought about by geopolitical conflict has evolved into a full-scale “checkup” of France’s economic resilience. Whether it can effectively resolve the short-term pains in the economic sphere, and use this as an opportunity to completely eradicate long-standing chronic ailments, will continue to test the political courage and wisdom of the French government. (Economic Daily reporter Li Hongtao)