Le sick man of Europe?
Over the decades, the phrase ‘sick man of Europe’ has been levied at many countries. Believe it or not, given its heralded status as the (often misfiring) engine of Europe and driver of growth, the phrase started life aimed squarely at Germany. The lesser loved UK, back when it was still a member state, was often the metaphorical patient. During the European sovereign debt crisis, those nations whose debt prices plummeted such as Spain, Portugal, Greece, and Italy also spent their time in the sanatorium. Today though, could it be the political influenza spreading through French Parliament that gives it the crown?
Well, quite possibly. The resignation of France’s latest Prime Minister, Sebastian Lecornu, pushed the Euro some 50 basis points lower early in the European trading session yesterday. There were not great hopes for Lecornu’s ability to form a government and on Sunday night the appetite of French lawmakers to form a ruling party by his side looked bleak. Figuring a jump is better than a push, Lecornu resigned early on Monday. The dent on the Euro yesterday was ultimately short lived and ultimately eradicated by losses in the Dollar outweighing the Euro’s fall earlier in the session.
Whilst credit prices in France are falling significantly below those of Germany, they remain contained and only a handful of basis points below the level observed during Barnier’s resignation in December 2024 and Trump’s volatility – inducing liberation day. Moreover, whilst the ECB is on paper precluded from using its transmission protection instrument under such circumstances, markets are acutely aware that the ‘whatever it takes’ central bank will not risk broader Eurozone instability. What is suggested to drive French political risks higher and becoming increasingly more likely are fresh elections and the potential resignation of the French President. Amidst a backdrop of a rather pricey Euro, the inability to form a government alongside the dwindling prospects of a reform-driven 2026 budget being agreed this year, it is inevitable that investor appetite for the Euro will be limited.
Discussion and Analysis by Charles Porter
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