France’s 10-year government bond yield briefly climbed above 5% on Oct. 21, the first time it has reached that level since 2002. According to CNBC, the benchmark 10-year French government bond, or OAT, moved above 5% shortly before 11:30 a.m. Paris time, then later traded around 4.9794%, up about 6 basis points.
Budget deadlock keeps pressure on France
France is dealing with both a budget impasse and protests that have continued to spread. Markets have kept pressure on the government to repair its public finances, while investors are concerned that a divided parliament may struggle to approve the spending cuts needed to reduce the deficit and debt burden.
Lawmakers are now negotiating the 2027 budget. Prime Minister Sebastien Lecornu said the goal is to cut €54 billion in spending, equivalent to about $60.6 billion.
France is currently subject to the European Union’s excessive deficit procedure. The EU has recommended that France bring its deficit down to close to 3% of GDP. At the end of last year, France’s deficit stood at 5.1% of GDP. Budget talks have repeatedly triggered political turmoil in recent years. Lecornu failed to secure a breakthrough in negotiations last year, and in February he used an emergency procedure to push this year’s budget through without a parliamentary vote.
Finance minister points to Article 49.3
Finance Minister Roland Lescure said in an interview with French radio station RTL on Oct. 21 that he was confident the budget would pass on time.
“I am very sure, because we have no choice,” he said. “We have tools to get the budget passed, so I believe we will succeed.”
Lescure said the government has “guardrails” available, including Article 49.3 of the French Constitution, which allows the prime minister to force legislation through without a vote in the National Assembly. “If we go off track, we will activate the guardrails,” he said.
Several past French governments have fallen over disputes on spending. Lecornu himself also resigned in less than a month because of budget disagreements, before being reappointed by President Emmanuel Macron a few days later. CNBC said forcing through spending cuts could trigger more instability.
Protests and election risk add to uncertainty
Efforts to control the deficit have also been complicated by protests across the country. The demonstrations began last month with a student movement in Paris calling for more government investment in education and relief from living costs. The unrest later turned more violent, and over the weekend it escalated into rioting and looting. Officials estimated the damage could reach hundreds of millions of euros.
Bond traders are also treating next spring’s French presidential election as another source of instability. Marine Le Pen, the right-wing candidate currently leading in polls, said earlier this month that if elected she could bring the deficit below 3% within 18 months. Critics, however, have questioned whether her proposed savings measures are credible.