While Italy, which was considered the epitome of fiscal instability in the past, regained trust, Fra..

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Marine Le Pen (left) and Jean-Luc Mélenchon. [EPA Yonhap News]

While Italy, which was considered the epitome of fiscal instability in the past, regained trust, France, a traditional power, fell into the biggest headache for the European bond market.

According to Yonhap News on the 28th, the Financial Times (FT) reported that France has recently overtaken Italy as the biggest source of anxiety for investors. Italy, where interest rates on government bonds were much higher than France in the past, is trading lower than most of the 10-year government bonds as of this summer. Investors are demanding higher risk compensation for French government bond purchases than Italy.

Mixed fiscal soundness and political stability are behind the reversal of the two countries’ situations. Italy has achieved steady fiscal tightening and unusual political stability, earning the trust of global investors. Italy’s national debt-to-GDP ratio fell to 139% this year from 154% in 2020, according to the European Central Bank (ECB). There is also a surplus in the basic fiscal balance in which government revenues, excluding interest payments, exceed expenditures. It is evaluated that the cabinet led by Prime Minister Jorja Meloni relieved the market by showing strong fiscal discipline.

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Italian Prime Minister Giorna Meloni. [AP Yonhap News]

France, on the other hand, is taking the opposite path. France’s national debt ratio rose from 114% to 117% over the same period. The fiscal deficit has already easily exceeded 5% of GDP.

While fiscal soundness continues to deteriorate, political uncertainty ahead of the presidential election from April to May next year has triggered a growing crisis. A recent French presidential poll suggests the possibility that far-left Jean-Luc Mélenchon and far-right Marine Le Pen will face off in the final round. It is a worst-case scenario for European investors concerned about the power of unmarket-friendly forces.

After all, panicked investors are throwing French government bonds. Funds that have fled France tend to move to Italian government bonds. Foreign investors such as Japan, which traditionally preferred French government bonds, are also rapidly reducing their share.

Experts warn that France’s crisis is a complex crisis that goes beyond a simple fiscal deficit. It is a so-called “perfect storm” in which low growth, fiscal deterioration, and political risks erupted at the same time. Market officials have joined forces to point to France as by far the weakest link in the European economy.