France's Political Crisis Fuels Economic Uncertainty

France, a cornerstone of the eurozone, faces a deepening fiscal crisis as political instability threatens its economic outlook. The French deficit reached €168.6 billion, or 5.8% of GDP in 2024, surpassing Greece, Spain, and Italy, according to The New York Times. Finance Minister Eric Lombard remains optimistic, asserting, “French Finance Minister Eric Lombard said financial-market stress will ease as the country remains on track with debt-reduction plans” [Bloomberg]. Yet, the looming threat of a government collapse, with Prime Minister Francois Bayrou facing a confidence vote on 8 September, has heightened market concerns. Investors are bracing for volatility, with the yield spread between French and German 10-year debt climbing to 82 basis points, a level not seen since January.

The political crisis has tangible market impacts, particularly on French equities and sovereign debt. The New York Times notes, “Investors hammered the French stock market and pushed up the country’s sovereign borrowing costs to among the highest in the eurozone.” Shares in major French banks like BNP Paribas and Société Générale fell over 5%, reflecting fears of a potential downgrade in France’s sovereign debt rating. The proposed budget, which includes €44 billion in deficit cuts and the controversial removal of two national holidays, has sparked public backlash and opposition threats to topple the government. Lombard warns that without urgent action, France’s borrowing costs could surpass Italy’s within weeks, stating, “It’s important to remove these uncertainties as soon as possible” [Bloomberg].

France’s economic challenges ripple beyond its borders, raising concerns about the eurozone’s stability. The New York Times highlights, “The situation reminds investors of the vulnerability of France but also of Europe more widely, given the fragile fiscal situations of a number of economies.” With growth projected at a mere 0.8% this year, France’s ability to deliver on its 2026 budget plan to reduce the deficit to 4.6% is in doubt. Investors are closely monitoring the France 40 index and EUR/USD forex pair for signals of further volatility. As Bayrou negotiates with opposition parties ahead of the confidence vote, markets await clarity on France’s fiscal path.​