Market Report: Concerns about France Weigh on the Euro

The escalation of violence in France also weighs on the financial markets. It revives concerns about French public finances. The euro fell temporarily back below 1.12 dollars. The ongoing mass protests and riots in France also leave clear traces on the financial markets. In the demonstrations with around half a million participants, violence and looting occurred in several cities of the country at the weekend. As a result, French bonds are again under great pressure after days of relative calm. The yield for ten-year securities at 4.9 percent is back at its highest level since 2002. Concerns about France’s public finances The euro also suffers from concerns about the French state budget. This morning, the common currency temporarily fell again under the 1.12 dollar mark. Confidence in the currency is closely linked to financial stability of the currency area. The protests over ailing educational institutions and high living costs not only shed light on the desolate household situation in France. They also fuel concerns about higher government spending when policymakers try to defuse the conflict with concessions. In addition, the damage and production restrictions resulting from the escalation of violence also directly affect public finances. “France today faces a social crisis, an immigration crisis, an energy crisis, an economic crisis, and a budget crisis,” said Louis-Vincent Gave of the analysis firm Gavekal Research. All this at a time when the French president is in office but not in power. The government led by Prime Minister Sébastien Lecornu, which belongs to the same political camp as President Emmanuel Macron, does not have its own majority in the National Assembly. This makes it extremely difficult to restructure the budget, especially as the next presidential election is due in six months' time. The debt ratio far exceeds the Maastricht criterion, and France’s public debt is equivalent to almost 120 percent of gross domestic product – double the maximum allowable under the Maastricht Treaty. Germany also breaks this criterion, but with a debt ratio of currently about 66 percent is still significantly better. The current concerns about France also weigh on the stock market, alongside those about the sustainability of the AI rally and the ongoing inflation. The DAX started weakly into the new week and lost 1.3 percent to 25,290 points by early afternoon.