Is France in trouble?

During the eurozone crisis, markets (and policy makers) paid close attention to "the spread". This was the difference between the 10 year bond yields of a given eurozone country, and 10 year German bond yields.

Because they share a single currency, the yields can't diverge too much. The first indicator something bad was happening to Greece was their bond yields were spiking. Greece couldn't afford to roll over it's debts at the interest rates markets were demanding, and had to be bailed out.

Markets then turned their eyes to Italy, but most of Italy's debt was incurred in the 1980's. In the last decade it's been running a primary surplus (i.e. the budget before interest payments is in surplus).

Now eyes have turned to France. Their debt is 116% of GDP and rising, as they're running both a primary deficit and an absolute deficit. France hasn't run a surplus since the 1970's.

Here is what has happened to the spread since Macron first got elected:

source

As you can see, in the lead up to the 2017 election, the spread surged from 45 basis points to 80 basis points as markets worried about LePen winning.

The markets calmed down after Macron won, but have started to worry again as he has not managed to get the debt down.

He then compounded the problem in June 2024 by dissolving the French Assembly and calling fresh elections three years before he needed to. The result is a complete deadlock as three blocs who detest each other each hold a third of the Assembly seats.

The new Prime Minister Michel Barnier somehow needs to get a budget through the Assembly. It needs to cut the deficit to please the markets.

Under French rules, there can't be another round of elections till June 2025 (one year after the recent elections), so Macron can't resolve any budget impasse by dissolving the Assembly again.

What happens if they can't get a budget through that satisfies the markets? The spreads will rise, making it difficult to borrow.

President Macron then has one more lever to pull: declare a state of emergency allowing him the ability to bypass the Assembly and enact a budget by decree.