Tone of French budget talks softens as pension reform comes into play

By Leigh Thomas

PARIS (Reuters) - The mood music around French budget talks improved this week as the Socialists softened their positions after new Prime Minister Francois Bayrou's government appeared open to the idea of watering down a contested retirement reform.

His government is trying to win assurances from some opposition parties and the Socialists in particular that they will not vote against its 2025 budget or back a potential vote of no confidence against him.

Bayrou, a long-time centrist figure in French politics, wants to avoid the fate of his conservative predecessor Michel Barnier, who opposition parties voted out last month because they felt his belt-tightening budget plans went too far.

That vote spooked investors and ratings agencies alike, leaving France with only an emergency bare-bones budget in place until Bayrou's government can pass more permanent legislation to help rein in a spiralling fiscal deficit.

New Finance Minister Eric Lombard met with most opposition parties this week before reworking the 2025 budget legislation, which has been stalled in the Senate since the demise of Barnier's administration.

Bayrou's government is making a particular effort to court the Socialists after its predecessor relied almost entirely on the tacit support of the far right, which eventually turned against Barnier.

In gestures favourable to the Socialists, Lombard said on Monday that he would soften the squeeze of the belt-tightening budget and make sure it included tax increases on the wealthy.

Bayrou also told unions this week he had no taboos about revisiting a deeply unpopular 2023 pension reform that gradually raises the retirement age to 64 from 62.

"We're trying to see if there are good reasons not to vote against Bayrou's government. If it goes in our direction for example on pensions, we are not going to cut off the branch we are sitting on," Socialist leader Olivier Faure said.

Having previously demanded that the 2023 pension reform be scrapped, he said the Socialists now wanted it to be put on hold for at least several months while broad negotiations are held to modify it.

Socialist Senator Patrick Kanner, who attended the talks with Lombard, said they expected a signal from the government in the coming days, before Bayrou makes his inaugural general policy speech to lawmakers on Tuesday.

The Socialists have so far been committed to a left-wing alliance with the Greens and the hard left France Unbowed (LFI), which together control the largest block of votes in the lower house when they vote together.

LFI's most prominent figure, Jean-Luc Melenchon, blasted the Socialists on social media for even contemplating anything less than scrapping the pension reform, President Emmanuel Macron's flagship reform.

One senior Socialist told Reuters the budget talks offered the party a chance to crawl out from under the shadow of the dominant LFI, which is pushing for Macron to resign despite his repeated assurances that he will not.

"If the government make gestures that help the Socialists say they are working for the French and not just themselves... we are not going to cause chaos and early elections," he said.

In his New Year's address, Macron signalled his opposition to reversing the retirement age hike saying the French generally need to work more, although there is little he can do to prevent parliament from amending the reform.

After Bayrou met with union leaders this week, the head of the FO union said he was starting talks about pensions in the right direction while the hardline CGT union was more cautious.

(Reporting by Leigh Thomas; additional reporting by Elizabeth Pineau)