The French government is facing uncertainty as its government bond yields have risen above 3 percent, resulting in a risk premium of 80 basis points compared to German federal bonds. This comes despite promises by President Macron’s government to prioritize fiscal consolidation. The EU Commission has initiated excessive deficit proceedings against France, with Finance Minister Bruno Le Maire attributing the market nervousness to concerns over extreme economic policies from the political fringes.
The upcoming parliamentary elections in France have raised fears of a potential debt crisis if extreme parties come to power. However, unlike the UK in 2022, when the Prime Minister resigned due to unaffordable financial plans, France’s debt situation is not unique. Other countries like Italy, the USA, and Japan also face high debt levels.
The key question lies in how the euro area and the European Central Bank (ECB) will respond to the situation. While a potential increase in market nervousness post-elections may test the ECB’s promises, it is unlikely to lead to a full-blown euro crisis. In the long run, a shift in economic policies towards sustainable debt management will be imperative for countries like France, Italy, and the USA.
