One week / one topic: Allez la France

What happened?

French borrowing costs keep climbing, both in absolute terms and against the rest of Europe.

The France–Germany 10-year spread has blown out to levels last seen during the Eurozone crisis.

Meanwhile, Italy – once the periphery's problem child – now borrows more cheaply than France.

In absolute terms, French 10-year yields are back to 2008 levels.

The difference? Debt-to-GDP back then was about 65%, while today it is about 120%.

Of course, this did not come out of nowhere… France has run a budget deficit every single year since 1974.

Over the past half-century, its deficit averaged about 3.6% of GDP, was never smaller than 0.4% (1980), peaked at almost 9% (2020), and stood at about 5.1% last year.

Visibly, the trend is getting worse – not better – recent efforts notwithstanding.

And yet, the political debate is about whether next year's deficit should be a little below 5% or a little above it… but 5% all the same.

Ahem, hello?

Like most other countries, nobody in France has the political will (or capital) to significantly cut entitlements or benefits, and gridlock is the default state.

For several years now, successive governments have only been able to keep the plates spinning until… until what, exactly?

On current trends, and with no reform, annual interest costs are on track to almost double from €66bn to €124bn by 2030, and the deficit would pass 5.7%.

That puts at risk what arguably makes modern France great: its schools, its hospitals and its social model.

Also, the upcoming presidential election in April 2027 does not look set to help either: the field could be one of the most crowded ever (20-plus candidates?), and the frontrunners on both extremes are not exactly reassuring…:

• Jean-Luc Mélenchon has floated cancelling the roughly €600bn of French debt held by the Banque de France – to "chuck it in the fire", as he put it.

• Marine Le Pen wants to cut the retirement age to 62, or perhaps even 60, and pay for it by cutting spending on migration, "useless" agencies and EU contributions.

Unsurprisingly, this fits with what I have written about government bonds in recent weeks.

The rise in yields looks increasingly like a credibility story rather than a pure inflation story, and markets are putting a price on who still gets the benefit of the doubt.

France is simply the latest – and perhaps most visible – test case, for now.

So, what is the value of watching France for how we want to be positioned?

Is this an idiosyncratic opportunity, part of a wider trend… or something else altogether?

Our observations

• Fundamentals: There is nothing new in France's fiscal arithmetic. What has changed is that time keeps passing without a political resolution.

  The market is less focused on whether the deficit ends up above or below 5%, and more on whether any budget can win enough political support.

• Price action: The speed of the widening stands out – but in absolute terms, French spreads remain well below where previous periphery trades played out.

  Meanwhile, the one-way momentum is strong, and stepping in too early is a real risk.

• Investor beliefs: France's old status premium has gone.

  Rather than an automatic buy signal, the spread may be more useful as a gauge of how worried markets are about duration and European sovereign risk more broadly.

So what?

Charles de Gaulle – whose biopic is filling French cinemas – described politics as action ("La politique, c'est une action").

Today, French politics looks more like inaction.

Nobody knows where the line in the sand is, in terms of what level of borrowing costs would precipitate an acute crisis finally forcing policymakers to enact structural reforms.

The cautionary tales are not hard to find…:

• Germany's Agenda 2010 reshaped welfare, pensions and the labor market.

• After the Eurozone crisis, Italy passed several structural reforms, and Spain raised its retirement age to 67.

• Greece took a lot of hard medicine to put its house back in order.

All these reforms were painful and imperfect, but they were real.

Britain, meanwhile, showed how quickly markets can lose patience with a country that is relatively wealthy and not especially indebted, once they decide that its politicians have given up on fiscal arithmetic.

Putting it all together, it’s hard not to think of the perennial doubts about whether the European model can pay for itself and stay competitive.

Is what’s going on in France a headwind for the euro and European equities? Possibly.

But the Italy–France chart is a reminder that sentiment this depressed can turn: a decade ago, few would have bet on Italy borrowing more cheaply than France.

At the moment, we are not treating the French spread as a standalone phenomenon, but it does feed into bigger portfolio questions: how much duration to own, how much of it should be European, and how much French.

For now, France remains on the watchlist… After all, “Impossible n’est pas français”.

Mood music: Édith Piaf – Non, je ne regrette rien

By popular demand, here is the One week / One topic playlist

The information provided should not be considered a recommendation to purchase or sell any particular security.