France's fiscal challenges should have limited Eurozone impact

Summary

• French political and fiscal uncertainties have resurfaced in the past week, with PM Bayrou calling for a confidence vote on September 8 in an effort to consolidate support for the government's budget proposals. However, several opposition parties have indicated they will not support the motion, which would force the government to resign, and also impact fiscal consolidation plans. Political uncertainty has also surfaced in the Netherlands, with an opposition party calling for a no-confidence motion in the government. Relative to Germany, French 10-year yield spreads have widened in recent days, although Dutch 10-year yield spreads have been relatively stable.

• While clearly problematic for the French economic outlook, from a longer-term perspective we believe France's fiscal uncertainties will have limited impact on the broader Eurozone economy and the euro. France's fiscal challenges appear to be relatively isolated, as opposed to being more broadly shared across the region.

• Some countries with elevated government debt levels (Italy and Spain) have enjoyed significant progress in reducing their budget deficits in recent years. Other countries with modest government debt levels (Germany and Netherlands) have pursued more expansive fiscal policies, which nonetheless have not significantly impacted the sustainability of public finances for those countries.

• Taking these trends into account, from a Eurozone-wide perspective, government deficit and debt levels have been reasonably stable in recent years, and we do not view the latest developments as a significant headwind for Eurozone-wide economic growth. We remain comfortable with our outlook for a broadly steady Eurozone GDP growth of 1.0% for 2025 and 1.2% for 2026. With fiscal concerns also seen remaining mostly contained to France, we also do not expect the latest French developments to have a long-lasting impact in the euro over the medium-term.

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