France Faces Fiscal Turbulence Amid Governance Crisis
France is grappling with significant fiscal challenges following the collapse of Prime Minister François Bayrou’s government, which failed to secure backing for €44 billion in proposed budget cuts set for next year, reports 24brussels.
HSBC economist Fabio Balboni cautioned that if ruling cuts are completely abandoned, borrowing costs across the eurozone, including France, could soar. He stressed that many European countries, especially France, simply cannot afford to allocate more resources solely for interest payments.
Balboni highlighted a phenomenon known as “fiscal dominance,” wherein central banks maintain low interest rates to enable government borrowing. However, such measures can lead to a swift rise in inflation.
Despite the shock of the recent political upheaval, investors have largely retained their confidence, as indicated by the current spread between French and German 10-year bond yields, sitting at 0.82 percentage points. This marks the widest gap of the year but suggests a slow deterioration rather than an imminent crisis. President Emmanuel Macron is striving to rally support for a deficit reduction plan rather than trigger new elections by appointing yet another centrist prime minister.
C’est la vie
The recent months have been particularly challenging for France, which has historically measured its economic strength against Germany. Growing political paralysis and rising debt levels have resulted in the nation being perceived more similarly to Italy. For the first time this century, Paris briefly experienced borrowing costs higher than those of Rome, albeit due to a temporary technical issue. This scenario raises alarms regarding the country’s escalating public debt, which exceeds €3.35 trillion, making it increasingly susceptible to a financial crisis.