With the gaze fixed on France and in the European bond market, Brussels and Frankfurt are monitoring the new data in the uncertain French political scene that affects the second largest European economy and is currently a focus of concern for Europe.
In today’s turbulent geopolitical situation where Europe is bearing the brunt of the effects of the war in Ukraine, as they are reflected to the greatest degree in the recessionary landscape of the German economy, the French political problem could develop into a fuse for greater upheavals in the European edifice, say actors with knowledge of economic data and the climate prevailing in the staff of Brussels and the European Central Bank (ECB).
At the moment, the market outlook is considered to be very positive, as European stock markets continue to move upwards and bond yields remain stable despite stormy political developments in France, with the fall of the Barnier government and the rejection of the French budget for 2025 from the Parliament.
Nevertheless, bond markets have already priced in the so far negative signals they are receiving from the impasse in the French political scene and the obstacles being erected to deal with the swelling French debt. The yield on the 10-year French bond has climbed to 2.9%, surpassing the yield on the Greek one, making France the country with the second highest borrowing cost in Europe after Italy (3.2%).
French public debt currently stands at 3.23 trillion. euros and is expected to increase in 2025 to 115.3% of GDP, from 112.7% of GDP estimated to reach this year. It is entirely in private hands for this reason and its service is affected by market fluctuations. It is indicative that to refinance its debt in 2025, France is forced to borrow from the markets around 310 billion. euro.
The cause of the high French public debt is the annual budget deficit which hovers around 6% and feeds back on an annual basis its inflation at high rates. It is the reason why the Commission has initiated excessive deficit procedures for France. The rejection of the 2025 budget plan limits hopes for an immediate response to the fiscal problem and the reduction of the deficit to 5%, as originally announced with the prospect of falling to 3% of GDP in the coming years. At the same time, the projected growth rate of the French economy is below 1% and is estimated to move to 0.8% in 2025.
Brussels and the ECB, in any case, as reported by competent sources, are on standby, monitoring developments and new data. Right now, the course of the bond markets is reassuring, which is why the ECB is expected to move in the directions that have largely been announced. Within December, it is expected to proceed with a further reduction in the interest rates of the euro by 0.25 basis points. Another reduction of the same amount is expected for January.
In any case, as confirmed from all sides, the ECB has the arsenal to deal with extreme situations that will threaten the European economy. The tools exist, as was demonstrated in the pandemic and also in the Greek debt crisis in the last decade. If necessary, the ECB will consider faster interest rate cuts and, in a second phase, strengthened government bond markets if they are called upon to face extreme situations or an unwanted debt crisis.