In the short term, the temporary renewal of the 2024 budget will help avoid total paralysis, but ambitious tax projects will remain on hold, affecting growth prospects.
France is going through a period of political and economic turbulence which is weakening its position within the euro zone. Yields on French 10-year bonds, reaching their highest levels in fourteen years, symbolize this instability. If these high rates are partly a reflection of the inflationary crisis of 2021 and 2022, inflation having since decreased, they are now more driven by a political risk premium exacerbated by the dissolution of the National Assembly and recent budgetary clashes . The situation has worsened since the overthrow of Michel Barnier’s government, highlighting the structural difficulty of reaching consensus in a fragmented political landscape.
The impact of this crisis goes beyond French borders. With 17% of euro zone GDP, a recession in France in the fourth quarter of 2024 would further slow down European growth, forecast at only 0.8% in 2025. The difficulty in defining a coherent budgetary policy also reduces the attractiveness of France for foreign investors. However, previous European crises have shown that the European Central Bank could intervene in the event of bond stress, thus avoiding systemic contagion. This perspective, coupled with the experience of sovereign debt buyback programs, reassures about the financial resilience of the euro zone.
The high rates on French bonds, however, increase debt service and restrict budgetary room for maneuver. This budgetary pressure limits investments, particularly in the real estate sector, and could encourage the ECB to relax its monetary policy to prevent a more marked slowdown in activity. In the longer term, the divergence of budgetary trajectories between member states could weaken the cohesion of the euro zone, further complicating the development of a single monetary policy.
-On the equity market front, political uncertainties weigh heavily. The CAC 40 has posted a negative performance since the start of the year, at -3.6%, while other European indices, such as the Stoxx 50, have increased by 8%. This underperformance reflects not only political tensions but also the weakness of several emblematic stocks such as LVMH, L’Oréal and TotalEnergies, penalized by the slowdown in China and refining margins under pressure. However, the CAC 40 remains attractive thanks to solid companies, well positioned on long-term trends such as digitalization and the emergence of the middle class in Asia.
France faces a critical challenge. If political fragmentation persists, institutional blockage could slow down the reforms essential to stabilizing public finances. The overthrow of the Barnier government illustrates the extent to which left and right oppositions can unite to prevent any significant budgetary progress. In the short term, the temporary renewal of the 2024 budget will help avoid total paralysis, but ambitious tax projects will remain on hold, affecting growth prospects and investor confidence.
In this context, France’s economic trajectory will depend on its ability to overcome institutional blockages and restore market confidence. Lessons from past crises show that concerted action between policymakers and the ECB can stabilize the situation. However, France is at a crossroads, where the choice between structural reforms and the status quo will define not only its economic future, but also its role within the eurozone.
