The Euro’s soft underbelly

The Euro has churned out its worst monthly performance in September since March against a backdrop of higher Euro yields and a tepid European Central Bank response during their last meeting. Now, with the French seemingly unable to produce a budget in anytime soon and only being given an even 50% chance of passing a budget before years end on Polymarket, the Euro’s woes seem far from over.

In fact, the problem seems likely to be exacerbated by the recent round of protests and the Governments compromise to improve school conditions within the country, a compromise that the largest teaching union within France estimated would cost crica. €10bln. The French fiscal deficit of over 5% and stubborn, having been over the EU limit a max 3% budget deficit per annum for 6 years now.

For comparison, the UK budget deficit is at 4.2% and the German at 3%, even Italy rests at 3% and falling. Yet the French seemingly care little for this comparison, even as yields on French debt rise above that of domestic corporate debt. When investors feel more comfortable lending to Luis Vuitton than the Government, it’s not a great sign.

On Tuesday, Marie Le Penn, number 2 of the party started by her father, Rassemblement National, appealed to the ECB for help with taming French yields. The ECB, hammered by its own issues regarding the threat of energy inflation and the need to raise the Zone’s interest rate, seems likely to sit on its hands for now.

Even the IMF have warned France to “get their house in order” before the situation deteriorates further. But for now, there seems very little motivation by French policy makers to alter course and it may take much more external pressure to convince them to see their error than is presently being exerted.

I am reminded of the ominous words uttered by then French PM Barnier during his doomed attempt to lower the deficit “we must resolve this issue ourselves, before someone else does it for us”.