The latest potential black swan: a fracturing of the Franco-German axis.
The bad news is that the OATS Spread (the gap between the yields of 10-year bonds issued by France, known as OATS for obligations assimilables du Trésor, and German bunds) is back at the center of discussion.
S&P was uncomfortable with the levels of French debt as a share of gross domestic product.
France’s general government debt-to-GDP ratio has become the third-highest in the euro area after that of Greece and Italy.
Bear in mind that the likes of Ireland, Portugal and Spain were all swept up in the eurozone’s sovereign debt crisis just over a decade ago.
If France’s position looks more stretched than theirs, that is concerning.
Greece came very near to leaving the eurozone back in 2015.
The crucial difference is that while the exit of a small and peripheral economy was just about conceivable, that doesn’t apply to France.
Once in office, politicians tend to try to stay there, which means not doing anything too stupid.
The Rassemblement years ago dropped the idea of leaving the EU, something long favored by many hard-right parties across Europe but tempered once the fallout of Brexit became obvious.
Giorgia Meloni in Italy, representing a far-right party, has so far done a skillful job of navigating a path for her government. There’s a risk that Macron ends up gifting the Rassemblement the opportunity to convince voters that they can be trusted.
In France, Charles de Gaulle stayed in power for a decade by regularly holding referenda and threatening to resign if he lost. It looked clever until the 1968 upheaval led to a referendum a year later that he lost and then had to resign.
Most pertinently, the right-wing President Jacques Chirac tried exactly this maneuver in 1997 by dismissing the legislature — and then watched as the left won a shock majority.
There are many ways this could go wrong.
Finally, there’s the risk that most scares investors — that the Rassemblement does get to form a government, and then provokes a crisis within the eurozone that the euro could not survive. That remains unlikely. But ultimately, Europe confronts a low-probability extreme event.
John Authers 12 June 2024
The head of France’s conservative party Republicans called for an alliance with the far right in upcoming snap elections,
New York Times 11 June 2024
https://englundmacro.blogspot.com/2024/06/the-head-of-frances-conservative-party.html
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