France, the weak link in European financial recovery? - September 01, 2025

Political risk in France is currently acting as a stress test for financial reflation in Europe. Barring the unlikely resignation of Emmanuel Macron, however, most concerns appear to have already been priced in.

After a favorable summer for European and global markets, political uncertainty in France has somewhat dampened investor enthusiasm. As was the case when the National Assembly was dissolved in June 2024, companies that generate a significant portion of their profits in France (banks, motorways, telecoms) are facing an increased risk premium, as they could be called upon to contribute to the budgetary effort. As a result, French financial stocks lost 10% in three days, and the valuation discount of French banks relative to other European banks reached around 25%.

The need for fiscal consolidation is also prompting economists to revise their growth forecasts downwards, even if the impact is relatively small on a European scale. Finally, the risk premium on French debt is rising again, with a 10-year yield spread of around 80 basis points compared to Germany, up from 65 basis points at the beginning of August (Chart 1).

Some strategists believe that this spread could rise to 100 basis points or more. However, France already has the highest long-term rates in the eurozone alongside Italy, even though its credit rating is still considered better than that of southern countries (Chart 2). France's rating is likely to be downgraded again this fall—the round of revisions begins on September 12 with Fitch—but the market has already priced this in, and even worse. Based on the current relationship between ratings and long-term interest rates, the France-Germany spread is likely to fluctuate around 60 basis points (assuming a one or two notch downgrade).

This new French episode is occurring at a time when the European bond market is experiencing low dispersion of long-term rates in the eurozone. This dispersion has been steadily declining since 2023, reaching its lowest level since 2008 (Chart 3). The markets now view France as an anomaly, even though governance in the eurozone inspires greater confidence. Against this backdrop of confidence in the eurozone, a France-Germany spread of 80 basis points therefore appears particularly high.

The convergence of European interest rates since 2023 (with the exception of France) is part of a powerful financial reflationary movement in Europe. This momentum is currently fueled by the attractiveness of the euro, which rivals the dollar, but also by German fiscal policy, the profitability and solidity of banks, the decline in short-term rates and the recovery of the yield curve, the resumption of bank lending, and private bond issues. Political instability in France is slowing things down somewhat, but does not call this process into question.

The main risk would come from Emmanuel Macron's resignation, which would weaken the political dimension of this renewed confidence in European finance. The French president has established himself as one of the pillars of European politics. His resignation could undermine the credibility of the EU, especially since the French political leaders in a position to succeed him are often ambiguous about the European project, even if no one is questioning the euro.

In the polls, a majority of French people want Macron to resign. However, the likelihood of this scenario seems rather low at this stage – with Ukraine and the trade war justifying a certain degree of continuity – but it could change. Apart from Macron's resignation, the issues at stake are more down-to-earth. They concern the nature and pace of fiscal consolidation. This debate is important, but it is unlikely to cause stress to spread across European finance. Moreover, economists have had time to factor the French case into their growth forecasts since the dissolution of June 2024, and these revisions do not call into question the scenario of European recovery.

Ultimately, France is now an anomaly in a European landscape marked by falling risk premiums and the rise of financial reflation. Barring a surprise resignation by Emmanuel Macron, this “stress test” will remain limited. But it serves as a reminder of the obvious: political issues remain at the heart of European financial dynamics.
In our diversified global funds, we are maintaining moderate exposure to French bonds. In our flexible European portfolios, we remain well invested in equities, but we have implemented a low-cost optional hedging strategy (put spread) on the Euro Stoxx 50 index.