Laurent Denize, Global Co-CIO ODDO BHF.
“A renewed euro crisis cannot be ruled out, given the long-term fiscal challenges facing a major eurozone member such as France. However, it is far from inevitable.”
Do you remember the euro crisis? It was a time of late-night crisis summits, last-minute bailouts and speculation about a break-up of the EU. Ultimately, the eurozone was stabilised and economic cooperation was even strengthened. With global bond yields rising, memories of that crisis are resurfacing. This time, however, the focus is not on a peripheral country but on France, one of the eurozone’s core economies. In early October, the risk premium on French government bonds relative to German Bunds exceeded 140 basis points, a level last seen during the euro crisis. The move has been driven by concerns over France’s fiscal discipline and fears that higher yields could significantly tighten financing conditions across the eurozone. As a result, the euro has recently come under pressure.
A difficult starting point for France
The pressures on global bond markets are hitting France at a particularly challenging fiscal and political moment. Structural weaknesses are underpinning the rise in risk premiums. Compared with Germany, the French economy is losing momentum. At the same time, the national budget remains deeply in deficit. For decades, government spending in France has exceeded revenue. The government expects total debt to reach 121.7 per cent of gross domestic product next year. France is already more heavily indebted than any other EU country.
Budget and elections in the markets’ spotlight
For investors, the first key question is whether the government manages to pass a budget. The draft budget for 2027 includes savings of 43 billion euros. Through this austerity programme, the government aims to reduce the budget deficit of 5.4 per cent and restore confidence among financial markets. However, passing such an austerity budget is a challenge, as the government has not had a majority of its own in parliament since the snap elections in 2024. If it manages to secure a majority for the budget with the help of individual opposition parties, this could calm the markets in the short term and reduce risk premiums.
