France - budgets and bonds

It was confirmed last week that the latest French government is at risk of falling. Prime Minister Bayrou, whose minority coalition administration has been unable to pass his budget, called a confidence vote for 8 September – and his prospects look finely balanced.

France is no stranger of late to political instability. Bayrou took office only in December 2024 – he was the fourth PM to serve during that calendar year – and there were 'snap' (unscheduled) parliamentary elections as recently as June 2024, which produced no clear winner (hence the subsequent unstable coalitions). The last scheduled parliamentary elections were only in mid-2022.

As in so many other countries, there is a potential populist waiting in the wings, in the guise of Marine Le Pen's National Rally (though Le Pen herself is currently banned from running for office). That said, France's centrist PM and president also face a newly-vigorous challenge from the left.

France's budgetary predicament is far from unique: it is one of half a dozen European countries with gross government debt above 100% of GDP, and a deficit in excess of 3%. France is not even the most indebted. However, IMF data suggest it may well – just – have the largest deficit in 2025, at an estimated 5.5%, though this of course may depend on the outcome of next week's vote. And the size of France's government – public spending is equivalent to almost three-fifths of GDP – is particularly big.

What might this mean for portfolios? French bonds have indeed lagged other European markets in 2025 to date. Ten-year OAT yields have nudged above those in Spain and Greece, and are neck-and-neck with Italian BTP yields. French stocks have also lagged.

But while those bond spreads may be embarrassing, in absolute terms the movements in French yields – and in stocks – have so far been far from catastrophic. The level of the 10-year yield, at 3.6%, is up 0.5 percentage points in 2025 to date (the 10-year German bund yield, at 2.8%, has risen by 0.4 points). Stock returns are still positive.

As we write, bond yields are rising again across much of the developed world, not just in France. Most of the time, as we note here often, the business cycle, not politics or budgets, is the main driver of bond yields – and economic activity, and inflation, have looked a little firmer in recent weeks.

This could change if a new government were to rethink France's commitment to the EU and the euro. The single currency would have little relevance without France's participation, and its failure would reverberate globally, and hit financial markets and portfolios hard. This seems unlikely, however, not least because President Macron himself seems set to stay in office even if this government falls. There are few calls for such a rethink, even among the populists.

If populists were eventually to take power in France, there may be a precedent for business as usual as far as relations with the EU are concerned. In Italy, populists have led or participated in government since 2018, and the coalition administration of Giorgia Meloni has just become the fourth longest-serving in the 79-year history of that republic. Italy's populists have often been seen as potential EU and euro disruptors; in office, they have been pragmatic, and neither the euro nor Italian bond spreads appear to have been hurt for long.

We think it would be premature, then, to advise significant changes to portfolios on account of France's political predicament: party politics does not always have a dramatic effect on economics and finance. Much depends on context, and the cycle.

Then again, perhaps it is government per se, not party politics, which matters. Switzerland, the best-performing big economy in our global macro scorecard, enjoys a strong currency and a widening yield discount. Its government is small, and its politicians invisible. Just saying.

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