France: why markets are growing uneasy

France’s fiscal deterioration and political uncertainty are likely to keep markets volatile, but stronger European safeguards make a repeat of the 2010–12 euro crisis unlikely.

• Since September, the CAC 40 has fallen 5.6% versus a 1.7% decline for the STOXX 600, while French 10-year yields reached 5%, around 1.5 percentage points above German yields, and the euro weakened 3% against the US dollar.
• French government debt has reached 120% of GDP and the budget deficit remains above 5% of GDP, while higher global yields are making debt refinancing materially more expensive.
• Parliament must vote on the budget by 17 December, but the current draft is only expected to prevent further deterioration and is unlikely, on current projections, to stabilise the debt trajectory fully.
• Political uncertainty is increasing ahead of the 2027 presidential and legislative elections; although Rassemblement National proposals include spending restraint, a medium-term primary surplus and debt-reducing fiscal rules, their credibility remains untested.
• Italy’s experience after Giorgia Meloni became prime minister in 2022 shows that governing constraints can produce more pragmatic fiscal policy than campaign rhetoric, although France may not follow the same path.
• The ECB’s anti-fragmentation tools, the European Stability Mechanism, stronger banks and smaller external imbalances reduce the risk of a country-specific shock becoming a systemic euro crisis.

Takeaway: Investors should remain vigilant rather than alarmed, as France faces an unavoidable fiscal adjustment and continued political volatility; Quintet has reduced European government-bond and equity exposure and added downside protection on European equities where suitable.