French stocks continued their decline on Tuesday, marking the second consecutive day of losses, following Prime Minister François Bayrou’s unexpected call for a confidence vote. This development has intensified concerns over the persistent political instability threatening the stability of the EU’s second-largest economy, reports 24brussels.
The CAC 40, the benchmark stock market index of France, fell by 1.46% as of 1:15 PM CEST, sharply contrasting with a modest 0.60% decline in the STOXX Europe 600, which tracks broader European equity performance.
Simultaneously, France’s 10-year bond yields stayed around 3.51%, reflecting a 10 basis point increase since Bayrou’s announcement on Monday, while remaining slightly below Italy’s yields, which are typically viewed as riskier by investors.
Nour Al Ali, a macro strategist at Bloomberg News, commented, “Political instability is eroding French bonds’ traditional core status. With austerity plans dividing parliament, France’s borrowing costs risk climbing further, leaving both bonds and equities struggling to regain momentum.”
In the aftermath of Bayrou’s announcement on Monday, the spread between French and Italian 10-year bonds briefly narrowed to 9.8 basis points— a level not seen since 1999. Additionally, the spread between French bonds and German Bunds, the eurozone benchmark, has widened by 7.6 basis points since the announcement, signaling growing investor unease.
Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, stated that the current turmoil stems from Bayrou and President Emmanuel Macron engaging in a “game of chicken” with the far-right and far-left factions over the upcoming budget.
Bayrou’s fiscal plan, outlined in July, proposes €43.8 billion in savings, primarily through spending cuts, with only 20% sourced from tax increases. He maintains that these austerity measures are essential to address France’s budget deficit, which reached 5.8% of GDP in 2024— significantly above the EU’s permissible limit of 3%.
His predecessor, Michel Barnier, resigned in 2024 after a failed attempt to pass a budget through a divided parliament that includes centrist, far-right, and far-left factions.
“Macron is playing a quite cynical game here,” Vistesen remarked. “He is hoping that by exposing the inability of parliament, in this case, the left and the right, to work together to actually come up with a budget… he’s going to show the people they [the left and right] can’t govern.”
“It’s a game of chicken, and French assets, and, eventually, consumer confidence, business confidence… are paying the price,” he added.
No escape?
Many analysts suggest that a clear resolution to France’s political crisis remains elusive.
If Bayrou loses the confidence vote on September 8, Macron may appoint a new prime minister, likely leading to a similar budget impasse, or he could opt for fresh elections. Polls indicate this scenario would not yield a clear majority for any political faction.
According to Charlotte de Montpellier, senior economist at ING, “Either path would inject fresh uncertainty into an already fragile political landscape,” adding, “France’s political instability is becoming an economic liability.”
Vistesen warned that should the French bond market “really start to crack” — suggested to occur if the spread between French and German bond yields exceeds 100 basis points — Macron may still shift blame onto his political rivals.
“Macron is just going to come out and say: ‘Hey, look, it’s not my fault. I’ve appointed the government. The government has put out a solution for this. We need to consolidate our finances,’” he concluded.
