Political uncertainty in France is rattling international markets, driving up interest rates and eroding investor confidence. Concerns over high debt levels and budget struggles have pushed the spread between French and German 10-year bond yields to 87 basis points—the highest since the 2012 European debt crisis.
Earlier this year, that gap was just 50 points.
French 10-year bonds now yield 3.02%, compared to Germany’s 2.15%, which acts as the Eurozone benchmark. Analysts, including Citigroup, predict the spread could widen to 100 basis points, and Commerzbank has advised investors to reduce their holdings in French bonds.
Major French financial institutions, including Société Générale, AXA, and Crédit Agricole, saw stock drops of around 4% on November 27. Meanwhile, the CAC 40 index dipped 1%, reflecting broader market anxiety tied to France’s fiscal outlook.
The country’s budget deficit, the largest in Europe at 6.1% for 2024, has drawn scrutiny from the European Union, leading to an Excessive Deficit Procedure. If Paris fails to meet the EU’s fiscal recommendations, it risks fines and reputational damage, further complicating its financial position.
Prime Minister Michel Barnier faces an uphill battle securing parliamentary support for the 2025 budget. With no majority, he must court either the left-wing opposition or Marine Le Pen’s National Rally (RN). Barnier has warned of financial turmoil if the budget is rejected, including soaring interest rates and market instability.
Le Pen has outlined three demands for her support: no tax hikes on the working class, stricter immigration policies, and a proportional voting system. Polls suggest a majority of French citizens favor the government’s collapse, a scenario that would likely benefit RN in future elections.
Adding to the tension, left-wing parties filed a no-confidence motion on November 27, promising further action if the government invokes Article 49.3 to bypass a parliamentary vote. Barnier has indicated he’ll use the article to pass the budget, risking the fall of his government, which has only been in place since September.
President Emmanuel Macron has reportedly expressed doubts about the government’s survival, though he later denied these remarks. Meanwhile, negotiations with the Socialist Party aim to prevent a full collapse by peeling them away from the left-wing bloc.
Markets are bracing for further shocks, particularly on November 29, when S&P Global may update France’s credit rating. France’s current “AA-” rating, downgraded last May, is under threat, with Moody’s and Fitch already maintaining negative outlooks.
If stability isn’t restored soon, France could face an economic and political storm with far-reaching implications for its role in the Eurozone.
