French financial markets tumbled on Wednesday as mounting concerns over Prime Minister Michel Barnier’s government stability rattled investor confidence. The political turbulence stems from a contentious draft budget proposal featuring €60 billion in spending cuts and tax increases, which the government lacks the parliamentary majority to pass conventionally.
The market reaction was swift and severe, with the spread between French and German 10-year borrowing costs widening to 0.9 percentage points—levels not witnessed since the 2012 Eurozone crisis. The Paris-based CAC 40 index declined 0.7 per cent, marking it as Europe’s worst-performing major market. Financial institutions bore the brunt of the selloff, with insurance giant AXA dropping 4.3 per cent and Société Générale falling 3.5 per cent.
The political deadlock has forced Barnier to consider using constitutional powers to bypass parliament, a move that would trigger a no-confidence vote. Far-right leader Marine Le Pen’s Rassemblement National party, which holds the largest parliamentary bloc, stands as a crucial factor in determining the government’s fate. Le Pen has explicitly threatened to topple the government if her demands to shield French citizens from tax increases are not met.
France’s fiscal position remains precarious, with the budget deficit projected to exceed 6 per cent of GDP this year—more than double the European Union’s 3 per cent target. The country’s 10-year bond yields have surpassed 3 per cent, reflecting growing investor anxiety over Paris’s debt sustainability. These yields now hover marginally below those of Greece, a stark reminder of the sovereign debt crisis that gripped Europe a decade ago.
Investment experts maintain a cautious outlook. Mark Dowding, chief investment officer at RBC BlueBay Asset Management, warns of potential further selling pressure if the political situation deteriorates. The government’s commitment to reduce the deficit to 5 per cent of GDP by 2025 appears increasingly unrealistic, casting doubt on France’s ability to meet EU fiscal requirements by 2029.
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