French debt and political instability unsettle financial markets

Investors are increasingly worried about France’s finances and political instability, raising concerns about a possible debt crisis in the eurozone’s second-largest economy.

France’s debt has risen to nearly 120% of its economic output, while its budget deficit has exceeded 5% for four years in a row.

The yield on French 10-year government bonds has climbed to nearly 5%, its highest level since 2002, and the extra yield over German bonds is the highest among eurozone countries.

The euro has weakened against the dollar since early September, while France’s borrowing costs have risen more than those of any other large industrial economy this year.

Successive governments have struggled to pass budget cuts because they lack a majority in parliament, and the current government is also a minority government.

Marine Le Pen, a leading contender to succeed President Emmanuel Macron, has signalled support for tighter budget discipline.

Investors will be watching whether France can rein in its deficit, but opposition parties have little incentive to back unpopular spending cuts ahead of the presidential election expected in April.