France: debt and disaffection

Debt and political disaffection go hand-in-hand in France. In the summer of 2024, President Macron’s centrist Renaissance party did poorly in European elections. Macron reacted with a snap general election, hoping it would strengthen his support, but the opposite was the case. Disaffection led to an almost equal three-way split between Marine Le Pen’s far-right National Rally (RN), the left-wing New Popular Front and a centrist grouping including Macron’s party. Michel Barnier, a veteran politician, failed to draw up a deficit-cutting budget that could secure broad parliamentary approval. That task now falls to Francois Bayrou, the new prime minister. Things have gone quiet...which is maybe a good thing.

The spread between French and German government bond yields remains the key risk barometer. It has been at a heightened level since summer 2024. The prospect of a renewed narrowing seems slim. French government finances are deeply unsustainable, with the government debt/ GDP ratio almost certain to continue trending higher in the coming years.