Since French president Emmanuel Macron’s surprise decision to call a snap election in the summer, French politics has effectively been stymied with an unworkable parliament split between the parties of the far-right Marine Len Pen, Macron and a weak left-wing coalition.
It has taken months for Macron to appoint a prime minister which eventually came in the shape of centre right technocrat Michel Barnier. Barnier’s decision to force through a budget seemed set to prompt a collapse of the government as we went to press. This could be the precursor to months of uncertainty as Macron seeks a replacement. A stable government looks almost impossible to achieve and new elections cannot be called until July.
Stock and bond markets appear to be increasingly worried about the impact all this chaos is having on the economy.
French bond yields have widened to a spread of more than 0.9% over German bunds, the highest since 2012 shortly after the European debt crisis spurred then ECB (European central bank) president Mario Draghi to declare to do ‘whatever it takes’ to protect the euro.
Today’s crisis is not of the same magnitude, and it is worth pointing out that spread widening is happening while bond yields are falling this time around.
Stocks are also feeling the pain with the CAC-40 index down around a tenth since the summer, clearly underperforming the German benchmark DAX index which is up 7% over the same period and climbed to a new high on 3 December.
These tensions are happening at a time when the European economy remains sluggish as confirmed by the latest manufacturing PMI (purchasing managers’ index) reading which sank to 45.2 in November from 46 in the prior month.
A sub-50 reading indicates activity is contracting and the headline reading has been under 50 since the middle of 2022.
While no one is yet talking about a sequel to the euro crisis of 2012, as discussed a vote of no confidence in the current administration would mean a lame duck administration for the next few months at least.
It therefore looks unlikely France can set a budget within agreed Eurozone parameters which may increase pressure on the euro, which has lost 5% of its value since the summer and languishes close to parity against the US dollar.
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