Financial markets have reacted negatively to the ongoing budget standoff in France, pushing the country’s bond risk premium to its highest level since the eurozone crisis over a decade ago. The interest rate spread between French and German bonds has reached 0.88 percentage points, doubling since March, and briefly peaked at 0.90 percentage points on Wednesday morning.
The rise in the spread reflects renewed uncertainty over France’s budgetary future. The far-right National Rally (Rassemblement National, RN), led by Marine Le Pen, has refused to approve the budget submitted to parliament by Prime Minister Michel Barnier. Without the support of the RN, Barnier lacks a majority in parliament. Le Pen has drawn three red lines, opposing increases in electricity taxes, cuts to pension indexation, and reductions in reimbursements for medicines—key measures in Barnier’s plan to stabilise France’s public finances.
Mounting Deficit Pressures
France faces a budget deficit projected to reach 5.5% of GDP this year, prompting pressure from the European Union to implement fiscal reforms. The prospect of Le Pen bringing down the government has alarmed bond investors, raising the perceived risk of French debt. Analysts at Citibank predict that the spread between French and German bonds could widen to a full percentage point if Barnier’s austerity measures are derailed, placing France’s borrowing costs closer to those of Greece and Italy.
Commerzbank has advised clients to sell French bonds, citing the country’s economic fragility. Investors have shifted preference towards southern European countries like Spain and Portugal, which have demonstrated greater fiscal discipline in recent years.
Potential Market Fallout
Prime Minister Barnier has warned of market turbulence if his budget proposals are rejected. France’s bond spread had already climbed sharply in June following early elections that bolstered the RN and weakened President Emmanuel Macron’s position. Observers at the time drew parallels with the “Liz Truss moment” in the UK, where the financial markets reacted so strongly to the former Prime Minister’s economic policies that she was forced to resign.
Further complicating matters, credit rating agencies are taking note. Standard & Poor’s is set to announce its review of France’s creditworthiness on Friday, with agencies Fitch and Moody’s already revising their outlooks to “negative.” While a downgrade has not yet occurred, such a move could further strain investor confidence.
Barnier faces a difficult choice: he could bypass parliament and push through the budget unilaterally. However, such a move risks triggering a vote of no confidence, which Le Pen could initiate with the likely backing of left-wing parties. This could plunge France into deeper political gridlock. Asked recently whether he expects to remain Prime Minister by Christmas, Barnier cautiously replied that it is “too early” to say.
