The euro and French government bonds are bracing for renewed turbulence, warns global financial advisory giant deVere Group, as investors weigh the fallout of a political showdown in Paris that could topple Prime Minister François Bayrou’s minority administration.
The common currency slipped from a five-week high against the dollar as traders booked profits and cut risk exposure ahead of a knife-edge confidence vote in France.
With Bayrou struggling to secure parliamentary backing for his austerity-driven budget, markets are preparing for the prospect of yet another collapse in government and a fresh wave of political uncertainty in the eurozone’s second-largest economy.
Nigel Green, chief executive of deVere Group, says: “The euro is in for short-term swings as political risk in France intensifies.
“Investors are repositioning quickly because the prospect of Bayrou’s government falling is very real, and the implications extend far beyond Paris.
“This matters for Europe’s credibility on fiscal discipline and for wider market sentiment.”
Bayrou’s €44 billion package of budget cuts, intended to narrow the deficit from 5.8% of GDP in 2024 to 4.6% in 2026, has met resistance across the political spectrum.
Opposition parties from both left and right have refused to back his plans, condemning proposed spending freezes, tax increases, and even controversial measures such as scrapping two public holidays.
If the confidence vote fails, it would mark the second French government collapse in less than a year, after Michel Barnier’s administration imploded last December.
French bond yields have already begun reflecting investor nerves. The 30-year yield climbed last week before retreating, and now hovers at 4.35%, while the 10-year stands at 3.43%.
Traders fear a sustained period of political paralysis could drive yields higher, tightening financial conditions in a country already under pressure from sluggish growth, heavy debt loads, and European Union budget rules.
Nigel Green notes: “The bond market is a barometer of confidence, and right now it’s flashing amber.
“Investors are demanding more compensation to hold long-dated French debt because the political backdrop is so uncertain. This uncertainty could easily spill over into the wider eurozone market.”
If Bayrou’s administration collapses, President Emmanuel Macron would be forced to name his fifth prime minister in less than two years, underscoring the instability at the heart of French politics.
Macron’s decision to call a snap parliamentary election last year was meant to clarify the balance of power but instead fractured it further, leaving France with a cycle of weak minority governments unable to build consensus.
The fallout of this latest episode will not be confined to France alone. The euro, already under pressure from divergent growth and inflation dynamics across the bloc, “will face renewed scrutiny,” explains the deVere CEO.
Investors are “sensitive to signs that one of the eurozone’s core economies is politically rudderless”, particularly at a time when global markets are on edge over interest rate shifts and slowing global trade.
Nigel Green says: “We expect heightened volatility in the euro as traders reassess European risk.
“Political instability in a major member state undermines confidence in the currency, particularly when the European Central Bank is already navigating complex policy choices on inflation and growth.
“Currency markets dislike uncertainty, and that’s exactly what France is delivering right now.”
While longer-term structural reforms may eventually emerge, the near-term picture is fraught with risk.
A government collapse could mean fresh elections or drawn-out coalition talks, both of which would prolong instability and spook international investors. In the meantime, traders will price in wider risk premiums for eurozone assets.
Nigel Green concludes: “The euro and French bonds are set for short-term turbulence. Investors should be prepared for choppier trading conditions as politics drives sentiment.
“For those with an eye on the medium term, volatility also creates opportunity, but the next few weeks will demand heightened vigilance.
“For now, both the euro and French sovereign debt are caught in the crossfire of a confidence vote that could reshape the balance of power in Europe.”
