The euro and French government bonds are bracing for heightened volatility as France confronts yet another political showdown that could unseat Prime Minister François Bayrou’s fragile minority administration.
The euro slipped from a five-week peak against the U.S. dollar as investors booked profits and scaled back exposure ahead of a critical confidence vote in Paris. The vote is seen as a make-or-break moment for Bayrou, whose austerity-driven budget faces resistance across the political spectrum.
Bayrou’s proposed €44 billion fiscal package—designed to reduce France’s budget deficit from 5.8% of GDP in 2024 to 4.6% by 2026—includes sweeping spending freezes, tax hikes, and controversial measures such as eliminating two public holidays. The plan has drawn criticism from both left- and right-wing parties, raising the likelihood of defeat in parliament.
“If Bayrou fails to secure support, France could witness the collapse of its government for the second time in less than a year,” warned Nigel Green, CEO of financial advisory firm deVere Group. “The political risk is very real, and the implications extend well beyond Paris. This is not only about fiscal credibility—it’s about Europe’s stability.”
French bond yields already reflect investor caution. The 30-year yield briefly spiked last week before easing, currently standing at 4.35%, while the 10-year benchmark sits at 3.43%. Analysts fear that continued political paralysis could push yields higher, worsening financing conditions for an economy already weighed down by sluggish growth, heavy public debt, and EU budget constraints.
Green emphasized: “The bond market is flashing amber. Investors are demanding higher compensation to hold long-term French debt because the political landscape is so uncertain.”
If Bayrou loses the confidence vote, President Emmanuel Macron would be forced to appoint his fifth prime minister in under two years, underscoring the fragility of France’s political system. Macron’s snap parliamentary election last year, intended to clarify the power balance, instead deepened divisions and left France with a cycle of weak minority governments unable to secure lasting consensus.
The turmoil in Paris is expected to reverberate across the eurozone, with traders warning that the euro could face renewed scrutiny. Divergent growth and inflation trends have already weighed on the common currency, and the risk of France becoming politically rudderless adds to investor unease.
“Currency markets dislike uncertainty, and France is delivering plenty of it right now,” said Green. “We anticipate heightened volatility in the euro as traders reassess European risk. Political instability in one of the eurozone’s largest economies undermines confidence, particularly as the European Central Bank navigates sensitive decisions on inflation and growth.”
Should Bayrou’s administration collapse, France could face either fresh elections or prolonged coalition talks, prolonging instability and spooking international investors. For now, both the euro and French sovereign debt remain trapped in the uncertainty of a pivotal parliamentary test that could reshape the balance of power in Europe.
