France on the brink drives spreads to crisis highs

The spread between French and German government bonds has reached its highest level since the height of the eurozone sovereign debt crisis in 2012, as Prime Minister Michel Barnier’s government appears increasingly likely to be toppled over the 2025 budget.

What you will learn:

• A government collapse would heighten short-term uncertainty and increase volatility in the bond market. However, we don’t see it having a major impact on the fiscal outlook at this stage, as we were already sceptical of Barnier’s chances of achieving meaningful fiscal consolidation.
• If Barnier’s government falls, France will start 2025 without a budget. In this case, the government would continue operating under the previous year’s budget and avoid a shutdown until President Emmanuel Macron nominates a new prime minister to draft a new budget.
• We already expected French spreads to remain elevated next year, driven by political instability and a still-high government deficit. If the Barnier government falls, volatility is likely to rise in the near term, but we don’t expect major further revision to our forecast at this point.

The government deficit forecast once again looks too optimistic.