This year, French markets have underperformed their global peers due to political turmoil. The risk of a government collapse will add further challenges to the eurozone economy and therefore put pressure on the euro.
The French stock market accentuated its losses on Wednesdayamid the current political turmoil, and the CAC 40 index fell 1.3% to stand at its lowest level since August 6. The benchmark index recovered some of the losses and ended 0.72% lower, but remains at its lowest level in four months. On Thursday, the index opened in the green, up 0.56% at 7,180.19.
The French Prime Minister, Michel Barnierfaces the possibility of being removed from office by opposition parties if he uses constitutional tools to push forward his budget plan. Both left-wing and far-right parties National Group They have the power to present a motion of censure and overthrow the French Government.
French markets underperform their global counterparts
The French stock market has come under pressure from the political turmoil of recent months. The CAC 40 is one of the few values with negative results this year, while all global benchmark indices show a strong rebound.
So far this year, the index is down 5.3%, compared to the euro Stoxx 600’s 5.6% rally and the DAX’s 15% growth. On a global scale, Wall Street repeatedly hit new highs, with the S&P 500 posting a rise of nearly 26% and the Chinese Hang Seng index climbing 13% this year.
French banking stocks were hardest hit by uncertainty surrounding the country’s public finances. On Wednesday, BNP Paribas SA shares plunged as much as 3%, hitting a new six-month low. Shares of France’s largest bank have fallen more than 11% so far this year, in contrast to the 18% rise in the Euro Stoxx 600 banking index.
Political unrest in France
In June Emmanuel Macron called early elections, which resulted in a minority government after appointing Michel Barnier as new leader. The veteran conservative unveiled his budget plan, which aims to reduce the level of public debt through broad spending cuts and tax increases. However, The project has faced firm opposition from leftist alliances and the far-right populist leader of the National Rally, Marine Le Pen.
This political blockade raises fears of crisis similar to that of Greece, as France’s deficit is expected to reach 6.1% of its gross domestic product (GDP) this year, more than double the limit required by the European Union. According to the European Commission’s forecasts, France’s debt-to-GDP ratio will reach 112.4% in 2024, the second highest in the EU.
The Government’s planreduce this ratio by 5.1% next year is widely considered unattainable. In May, S&P Global Ratings downgraded France’s credit rating from AA to AA-, forecasting a deficit level of 3% of GDP through 2027.
Concerns about France’s political and financial stability have widened the spread between bond yields German and French public debt – a key measure of market risk sentiment – to 86 basis points, the highest level since July 2012.
The euro may come under further pressure
France’s political uncertainty, along with Germany’s auto industry crisis and Trump’s tariff threat, added to the eurozone’s bleak economic outlook.
This is likely to cause a further depreciation of the euro against other currencies of the G-10 group, especially the US dollar. EUR/USD fell slightly overnight to 1.05 at 5:50 CET today, remaining at a one-year low.
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