Though there might not be panic, there is nonetheless a growing sense of concern and recognition that finding a way out of the crisis is becoming increasingly difficult. Financial markets understandably reacted on Monday, October 6, to the third collapse of a French government in 10 months, confirming that political instability has now become a lasting feature of the European Union's second-largest economy.
Investors and economists have begun assessing various short-term scenarios. Some, such as Léo Barincou, senior economist at Oxford Economics, are anticipating a dissolution of the Assemblée Nationale and that "the 2025 budget will very likely be at least temporarily carried over to 2026," which would result in a budget deficit higher than this year's. That prospect has fueled mistrust toward French equities and government bonds.
On Monday, the CAC 40 index on the Paris Bourse dropped 1.36%, falling below the 8,000-point mark, which it had passed on October 2 for the first time since March. Among the biggest losers were banking stocks, including Société Générale ( – 4.2%), Crédit Agricole ( – 3.4%) and BNP Paribas ( – 3.2%). In the bond market, the yield on 10-year government bonds (OATs) − which moves inversely to their price − rose to 3.57%, overtaking its Italian equivalent.
The yield spread with German bonds of the same maturity – which measures the risk premium investors demand to lend to France rather than Germany – widened further, briefly surpassing 88 basis points, its highest level since December 2024. As a collateral victim of French uncertainty, the euro dipped below $1.17 during the session before recovering some ground.
A cautious reflex
16 months after the dissolution of the government on June 9, 2024, these market swings are no longer unusual, but they reflect a well-established cautious reflex due to a lack of clear prospects. "The budgetary and fiscal situation is well known. Everyone knows there are major projects to undertake, but what stands out is that there is no political response that would allow for stabilization. And that is a situation markets dislike," explained Matthieu de Clermont, head of insurance investments at Allianz GI, an asset management company.
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