Fights over the budget and a growing debt problem promise a difficult autumn
In June 2024, French finance minister Bruno Le Maire warned that a victory by Marine Le Pen’s National Rally (RN) could spark a sell-off of French government bonds, comparing the scenario to the market turmoil triggered by Liz Truss’s economic policies in the UK. Le Maire cautioned that the hard-right policies of RN would cause uncertainty, undermining investor confidence in French debt. This, he suggested, could lead to higher bond yields and rising borrowing costs for the French government.
This warning echoed the anxiety seen in the markets after Emmanuel Macron’s surprise decision to call early elections in June. The French bond market reacted sharply, with yields spiking, signaling an increase in risk for the country’s debt. By the end of June, the spread between French and German bond yields had widened to its highest level since the 2012 European debt crisis, reflecting the market’s concerns over the political and fiscal direction of France.
Despite Le Maire’s alarmist rhetoric, the market seemed to calm somewhat in early July after the hard-right RN failed to secure a majority in the second round of elections. However, bond yields remained elevated, indicating continued concern about the country’s debt sustainability. While the immediate crisis was averted, the long-term effects of political uncertainty and fiscal mismanagement remain pressing issues for the French government.
The looming crisis over France’s growing debt problem could be exacerbated by the political divisions within the government, especially in relation to budget decisions. France is facing substantial challenges to reduce its deficit and manage its spending while attempting to address broader economic issues. This is where the risk of a “Liz Truss moment” becomes particularly concerning: a failure to balance the budget or to implement market-friendly policies could send bond yields even higher, triggering a fiscal crisis.
Further complicating matters is the fact that the National Rally’s success, despite failing to secure an outright victory, signals a shift in the political landscape that could lead to future instability. With a growing populist movement gaining traction, France faces increasing uncertainty in both its political future and its ability to manage its finances. The RN’s rise represents a challenge to the establishment and poses risks to the stability of the French economy, particularly if the hard-right pushes for policies that alienate investors.
This situation points to a potential crisis in the autumn. If the French government struggles to rein in its deficit or find consensus on economic reforms, the market may react more severely, with further increases in bond yields and a deterioration of France’s economic standing in Europe. The political challenges ahead are considerable, and the ability of the French government to navigate them will determine whether the country can avoid a deeper crisis or whether it will face the kind of instability seen in the UK with Truss’s brief tenure.
In the coming months, France will need to address both its internal political divisions and its growing financial risks. If the government fails to deliver sound fiscal policies and maintain investor confidence, the country could find itself in a perilous position, with worsening debt, rising costs, and increasing political unrest. This could result in a far more damaging scenario than any previous financial crisis France has faced.