Bond Markets Dictate Paris Budget as Prices Bite Workers

French output fell 0.1% in the third quarter, Insee announced on Friday, after stagnating in the second quarter and shrinking 0.2% in the first. No growth since January. Inflation, meanwhile, hit 3.4% year on year in October, up from 3.1% in September and the highest since January 2024, according to Insee. Prices climb, output sinks, and the people paying for both are the ones standing in the supermarket aisle.

Household consumption did accelerate, by 0.4%. The contraction came from production: transport equipment fell 3.5%, dragged down by aerospace (-4.5%) and automotive (-1.5%). Agri-food activity dropped 1.5%, hit by poor summer harvests. Whether the workers in those sectors see any of the adjustment coming is a question nobody in the official commentary seems keen to ask.

The Bond Market Holds the Pen

Last week France's borrowing costs climbed above 5% on the financial markets. As of Friday the 10-year yield sits at 4.9%, 0.17 percentage points below the peak of 22 October, with the Franco-German spread hovering around 1.55 percentage points. A strategy paper by Jérémie Peloso of BCA Research, seen by Euronews, credited a surprise-free ECB meeting for the easing, though Christine Lagarde declined to comment on the French situation.

Peloso, BCA's chief strategist for Europe, told Euronews that "France is highly likely to experience a technical recession over the coming quarters," a scenario he said was conceivable even before "the recent budgetary turmoil and the rout on the bond market." Note who is being consulted here: a strategist writing for investment clients.

Jérôme Mathis, an economics professor at Paris-Dauphine University, was blunt about what actually matters. "The main risk to the French economy is not the absence of a budget. It is the absence of visibility over the trajectory of public finances," he said. Visibility, that is, for investors. Companies postpone investments, households defer spending, and "the markets demand a higher risk premium." Markets, he said, aren't doubting France's technical ability to raise taxes or repay its debt. "They are more doubtful about its ability to slow their increase."

Governing Without a Majority

Economy and Finance Minister Roland Lescure went on Franceinfo to call the economy "at a standstill" and warn the country "will hit the wall" if the "recovery" budget isn't adopted. The government has no majority in parliament. If talks fail, it isn't ruling out article 49.3 of the Constitution, which pushes a bill through without a vote unless a no-confidence motion carries. The other option: ordinances, a route never used to pass a budget since the Fifth Republic was created in 1958.

Mathis offered the cold arithmetic. Adopting a budget is not "decisive" in itself and won't "miraculously revive activity in the short term." Worse, "a fiscal adjustment plan generally tends to weigh on growth in the immediate future." So the budget meant to calm the markets may deepen the slump. Meanwhile, he noted, markets "generally prefer a contested decision to a prolonged lack of decision", a preference for decisiveness over consent that tells you everything about whose confidence is being courted. An ordinance budget, he added, could be seen as fragile or "liable to be overturned after the presidential election."

The Street Has Its Own Calendar

The base article mentions, almost in passing, that the social climate "remains highly volatile on the eve of a new nationwide day of mobilisation against the high cost of living and in support of young people's demands." That's the other side of the ledger. While ministers and strategists argue over risk premiums and constitutional shortcuts, people are organising a nationwide day of action over what things cost and what young people are demanding.

The pattern is familiar. Elected officials plead for a budget to reassure bondholders, an investment strategist forecasts recession, a professor concedes the austerity fix may drag growth down further, and the bill lands on households already squeezed by 3.4% inflation. Pressure on interest rates, Mathis concluded, "is likely to persist, whatever institutional vehicle is chosen to pass the budget." The vehicle changes. The passengers who pay don't.