France a ‘fiscal time bomb' for EU
The euro dropped to a one-month low this week, driven by tensions over French Prime Minister Francois Bayrou's massive deficit-cutting plan. His proposals, including slashing public sector jobs and curbing welfare spending, could fuel debate in France's minority government and undermine investor confidence, the strategists warned.
In a note seen by Bloomberg, currency strategist Francesco Pesole warned on Wednesday that while the euro's decline was largely dollar-driven, it was also due to political and fiscal challenges in France.
'The French deficit story has been very much in the background as of late, but [Tuesday] probably served as a reminder that it is a ticking bomb for EU sentiment,' Pesole wrote, adding 'We could start seeing some FX spillovers in the coming months.'
Bayrou's €43.8 billion ($50.9 billion) plan targets a deficit that reached 5.8% of GDP last year – double the EU's 3% limit. He warned on Tuesday that excessive debt posed a 'mortal danger' and proposed scrapping public holidays to boost productivity and freezing pensions.
The proposals have faced backlash, with left-wing parties accusing the government of prioritizing military spending over social welfare. Jean-Luc Melenchon, leader of La France Insoumise, called for Bayrou's resignation, saying 'these injustices cannot be tolerated any longer.'
France's military budget is slated to rise to €64 billion in 2027, double what the country spent in 2017. President Emmanuel Macron has announced an additional €6.5 billion in funding over the next two years, citing heightened threats to European security. A new defense review released this month warned of a potential 'major war' in Europe by 2030, listing Moscow among the top threats. The Kremlin has dismissed claims it is planning to attack the West, accusing NATO of using Russia as a pretext for military expansion.
Bayrou, who has survived eight no-confidence motions, must secure parliamentary backing for his proposals before presenting the full budget in October. The right-wing National Rally party has opposed the cuts and called for another vote on his government.
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