June 18
By Pierre Briancon
LONDON, June 18 (Reuters Breakingviews) – France has the largest public debt load, opens new tab in Europe, at 2.3 trillion euros, so investors’ concerns over a far-right victory in upcoming elections are understandable. If Marine Le Pen’s Rassemblement National (RN) comes out as the clear winner of the first round of voting on June 30, markets will become even more turbulent. With the European Central Bank on the sidelines and Brussels wary of a eurosceptic government, France will feel lonely in a crisis.
Yields on French 10-year government bonds are now at 3.1% , a level last seen in 2012. They’re only up slightly since their level before the European Parliament’s election on June 9. But yields on other European government bonds have declined, as markets appeared to prefer German, Dutch or even Spanish bonds. Investors are demanding an interest rate on France’s 10-year debt that is 0.7 percentage points higher than the one on German bunds of the same maturity . That “spread” was less than 0.5 percentage points before the European elections that saw RN garner 32% of the vote.
A French financial crunch may take time to unfold, not least because the country’s political landscape will be cloudy until the second round of voting on July 7. RN leaders have hinted that, even if they ascend to power, they may not do much before the Paris Olympic Games in late July to early August, eager as they are not to spoil that party.
But if Le Pen’s party were to implement the policies it has been touting, the budget deficit, which currently stands at a gaping 5%-plus of GDP, is certain to widen. And if investors really start worrying about assets other than government bonds – say the country’s banks and over-leveraged companies – France will find it hard to muster support.
The ECB has, in theory, an ideal tool: the Transmission Protection Instrument, opens new tab, which allows it to buy government bonds in times of turmoil. The problem is that TPI is supposed to be used for countries where “the trajectory of public debt is sustainable” – and that’s hard to argue for France at present.
The other support that would be lacking is other governments’ political goodwill. If France joined Hungary and Slovakia in a Brussels-bashing gang of three, Paris would not be able to count on understanding ears at the EU level. And a party that campaigned on protectionism and isolationism would then begin to understand what isolation means.