Yield on 10-year government bonds passes 5% amid failure to pass budget and fallout from violent street protests

France’s borrowing costs have climbed above 5% for the first time in 24 years as political concerns and the government’s failure to agree a much-delayed budget spook the financial markets.

With some civic buildings still smouldering from recent riots, a fresh bout of selling pushed up the yield – or interest rate – on bonds issued by the second largest economy in the eurozone.

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© Photograph: Michel Euler/AP

© Photograph: Michel Euler/AP

© Photograph: Michel Euler/AP

Eurozone industrial production contracted for a second consecutive month in August, with Belgium recording one of the steepest declines. The latest figures expose continuing weaknesses in Europe’s manufacturing sector as governments confront high energy costs and growing international competition.

Industrial production in the eurozone fell by 0.5 per cent in August compared with July, according to figures released by Eurostat on Thursday, adding to evidence that European manufacturers are struggling to sustain a recovery amid rising energy costs and uncertain demand.

The decline followed a revised contraction of 0.3 per cent in July, while output across the wider European Union fell by 0.3 per cent in August. Compared with the same month last year, eurozone production was down 1.1 per cent, against a decline of 0.2 per cent across the EU as a whole.

Belgium recorded the largest monthly contraction among the member states covered by the release, at 5.1 per cent, followed by Ireland at 3.1 per cent and Portugal at 2 per cent.

The latest industrial production figures underline the uneven performance of Europe’s factories, with losses concentrated in some economies and sectors while others continue to expand.

Manufacturing weakness spreads unevenly

The sectoral breakdown presents a particularly revealing picture of the pressures facing European industry.

Production of intermediate goods, which include materials and components supplied to other manufacturers, declined by 0.8 per cent across the eurozone in August. Energy production fell by 0.6 per cent, while output of non-durable consumer goods contracted by 2.7 per cent.

By contrast, capital goods production increased by 0.4 per cent, indicating that activity in equipment and machinery manufacturing remained comparatively resilient.

The divergence was also pronounced between member states. Industrial production increased by 6.5 per cent in Sweden, 4.3 per cent in Estonia and 2.6 per cent in the Netherlands.

On an annual basis, Ireland recorded a 15 per cent decline, followed by Belgium at 7.1 per cent and Bulgaria at 5.4 per cent. The Netherlands, meanwhile, registered growth of 9.8 per cent compared with August 2025.

These variations make it difficult to describe Europe’s industrial position as a single, uniform downturn. National production figures reflect different industrial structures, production cycles and exposure to particular markets.

Ireland’s figures, for example, can be influenced by changes in output among large multinational enterprises, while Belgium’s manufacturing economy is particularly exposed to developments in chemicals, pharmaceuticals and energy-intensive production.

Nevertheless, the simultaneous contraction of industrial output across the eurozone reinforces concerns about the strength of the European economic recovery.

Energy prices and industrial competitiveness

The continuing disruption of global energy supplies has complicated the position of European manufacturers, particularly businesses that depend on predictable electricity and gas prices.

The Middle East conflict has increased uncertainty over energy costs and transportation, making production planning more difficult for companies operating with substantial fuel, heating or electricity requirements.

As EU Today reported earlier this week, Brussels has already moved to delay certain methane requirements for energy imports as governments seek to limit additional pressure on gas supplies.

The decision reflects a wider debate over whether the EU’s existing regulatory framework adequately accounts for the international cost disadvantages facing European industrial producers.

Chemicals, metals, fertilisers and other energy-intensive industries must compete with manufacturers operating in markets where energy costs and regulatory requirements can differ considerably.

The problem extends beyond immediate profitability. Persistently unfavourable operating costs can affect decisions about new factories, maintenance, modernisation and the location of future investment.

Those decisions may have longer-lasting economic consequences than monthly fluctuations in production.

Industrial policy under political pressure

The figures arrive as EU governments debate the future of European industrial policy, including the treatment of imported products and the conditions under which companies should qualify for public support.

Recent disagreements over proposed European-content requirements have illustrated divisions between governments seeking greater protection for EU manufacturers and those concerned that restrictive rules could increase costs or disrupt supply chains.

In a recent warning over the proposed Made in Europe framework, Mercedes-Benz chief executive Ola Källenius argued against excluding Britain from industrial arrangements intended to strengthen European production.

The debate is particularly consequential for automotive manufacturers whose supply chains extend across EU borders and into neighbouring countries.

Meanwhile, the proposed EU budget for 2028–2034 has become another focus of disagreement, with member states questioning how much funding should be devoted to industrial competitiveness, strategic technologies and energy infrastructure.

The immediate economic issue is whether European factories can recover production as energy costs remain elevated and external demand fluctuates.

Eurostat’s August figures do not establish how individual government policies have affected output, nor do they determine whether the contraction will continue. They do, however, show that industrial activity entered the autumn with limited momentum.

The next industrial production release, covering September, is scheduled for 16 November and will provide an indication of whether the late-summer weakness persisted into the final quarter of the year.

France faces growing pressure from eurozone governments and financial markets to secure its 2027 budget as borrowing costs climb towards levels not seen for more than two decades, raising questions about Paris’s ability to restore control over its public finances.

France is coming under increasingly direct pressure from its eurozone partners to resolve the political dispute surrounding its 2027 budget, with European finance ministers warning that continued uncertainty threatens confidence in the country’s public finances.

The warning follows a sharp increase in French government borrowing costs. Yields on ten-year sovereign bonds have risen by nearly 80 basis points since September, reaching levels last recorded in 2002. Investors are demanding higher returns to finance a government whose debt continues to increase while its capacity to impose spending restraint remains constrained by parliamentary divisions.

At the Eurogroup’s October discussions, finance ministers and European Central Bank officials pressed Paris to demonstrate that it can adopt a credible budget and comply with its commitments under the EU’s fiscal framework.

France’s difficulties have implications beyond its domestic politics. As the eurozone’s second-largest economy, France occupies a position fundamentally different from smaller countries that experienced sovereign debt crises during the previous decade.

Borrowing costs expose political weakness

The French government expects to borrow approximately €340 billion in 2027, making continued access to financial markets at sustainable rates an essential element of its fiscal strategy.

That financing requirement reflects both the need to cover the annual deficit and to refinance existing debt as government securities mature.

France’s public debt is already approaching 120 per cent of gross domestic product. As EU Today previously reported, official projections indicated that the debt ratio could reach 121.7 per cent in 2027, up from 115.7 per cent at the end of 2025.

The latest increase in yields adds another complication. Higher interest costs do not affect the entire stock of debt immediately because much of it was issued at earlier rates. They do, however, increase the cost of new borrowing and refinancing, progressively reducing the money available for other government commitments.

France also faces a difficult political timetable. With the presidential election approaching in 2027, parties are reluctant to accept measures involving spending reductions, higher taxation or changes to public services.

Prime Minister Sébastien Lecornu’s government has been attempting to reduce the deficit from an estimated 5.4 per cent of GDP in 2026 towards five per cent. Even that objective remains substantially above the EU’s three per cent reference value.

Brussels has limited room to compromise

Economic Commissioner Valdis Dombrovskis has emphasised the importance of predictable fiscal policy and credible deficit reduction.

France is already subject to the EU’s excessive deficit procedure, under which member states must demonstrate progress towards agreed fiscal objectives.

The reformed European fiscal framework permits certain deviations from expenditure commitments in exceptional circumstances, but it does not provide an unrestricted exemption from debt sustainability requirements.

Paris therefore faces a double constraint. It must convince domestic political forces to support a budget while demonstrating to Brussels that its spending plans are sufficiently credible.

The danger is not necessarily an immediate financing crisis. France retains a large, diversified economy, deep financial markets and substantial tax-raising capacity.

The more immediate risk is that prolonged political deadlock produces progressively higher borrowing costs, making future fiscal adjustments more expensive.

Why the ECB cannot simply intervene

The European Central Bank has instruments designed to counter destabilising market conditions, but these are not intended to finance governments that are unwilling or unable to implement sustainable fiscal policies.

Bank of France Governor Emmanuel Moulin said on 7 October that France did not currently require ECB assistance. He argued that the solution lay in adopting a credible budget rather than expecting monetary intervention.

His position follows increasing speculation about whether the ECB could intervene if French bond yields continue rising.

Such intervention would raise difficult questions about the relationship between monetary policy and national fiscal responsibility. The ECB must consider financial stability across the entire eurozone, but it cannot remove the political obligations of individual governments.

France’s existing excessive deficit procedure also complicates its eligibility for certain forms of exceptional support.

The wider European consequences

France’s problems are developing at a particularly difficult moment for European public finances.

Governments are confronting higher defence commitments, expensive measures to protect households against energy inflation and demands for greater investment in industrial competitiveness.

Italy, another heavily indebted eurozone economy, is facing related pressures. The combination places additional importance on the credibility of the EU’s fiscal rules.

The political consequences within France are already visible. Marine Le Pen has presented a programme proposing €140 billion in spending reductions, while other parties have advanced sharply different approaches to taxation, debt and public expenditure.

Those competing programmes illustrate the difficulty of securing a parliamentary consensus capable of reassuring markets.

The approaching presidential election reduces the likelihood of a durable settlement before voters choose France’s next head of state.

Eurozone partners cannot resolve that impasse from Brussels or Frankfurt. They can insist on fiscal commitments and provide a framework for adjustment, but the political decisions remain with Paris.

France’s immediate challenge is to prevent its budget dispute from becoming a broader loss of confidence in the government’s capacity to manage its finances.

Italia e Francia devono finanziare difesa e investimenti. Ma hanno un enorme debito pubblico. Una proposta del 2014, aggiornata, consente di ridurne lo stock senza trasferimenti tra paesi e senza perdite per i creditori. E può convenire anche ai “frugali”.

L'articolo Ridurre il debito pubblico si può. E conviene a tutti proviene da Lavoce.info.

France’s borrowing costs have risen to levels last seen more than two decades ago as investors shift towards German, Dutch and other lower-risk European debt, placing Paris at the centre of renewed concern over eurozone public finances.

France is emerging as the principal source of concern in Europe’s government bond market as investors reassess the fiscal strength of eurozone states and increasingly move money towards Germany and other countries regarded as safer borrowers.

The yield on French ten-year government debt has reached its highest level since 2002 after rising by about 70 basis points during September. The difference between French and equivalent German borrowing costs approached 160 basis points last week, its widest since 2012, according to market reporting on the sell-off.

The shift represents a sharp reversal in how investors view French sovereign debt. France has traditionally traded close to Germany and benefited from its status as one of the eurozone’s largest and most liquid bond markets. It is now being treated increasingly as a country whose political and fiscal outlook warrants a substantial premium.

The immediate concern is the French budget.

Paris said in September that this year’s deficit would exceed the government’s five per cent target, while the country faces the additional challenge of issuing a record €340 billion of government bonds in 2027. The money will be needed both to finance current expenditure and refinance debt accumulated during the Covid period.

EU Today reported earlier this week that French debt concerns had already pushed the euro to a 17-month low against the dollar. Political uncertainty ahead of the 2027 presidential election has added to market concern over whether any government will be able to deliver the spending reductions required to stabilise the public finances.

Bond markets, however, are responding to France’s present position rather than promises extending into the next presidential term.

The movement is also beginning to alter longstanding assumptions about which European sovereign borrowers are considered risky.

Italy remains vulnerable. Its ten-year bond spread over Germany rose to about 130 basis points last week, compared with roughly 80 basis points a month earlier. Italian public debt stands at around 138.6 per cent of GDP, and Rome expects its deficit to move above the EU’s three per cent ceiling.

Yet French debt has recently come under greater pressure than Italian debt.

Spain provides an even more striking contrast. During the eurozone sovereign-debt crisis in 2012, Spanish ten-year bonds yielded around five percentage points more than French debt. Spain’s ten-year yield is now approximately 75 basis points below France’s.

The difference reflects stronger Spanish growth and improved confidence in Madrid’s finances, although investors are watching Spanish and Portuguese debt for evidence that the French sell-off is spreading elsewhere in the currency union.

So far, the movement is not comparable with the eurozone crisis of the early 2010s. At that time, Italian bond spreads above Germany exceeded 500 basis points and Greece’s reached thousands of basis points. Current differences remain far smaller.

The direction of capital flows is nevertheless notable. Germany has re-established itself as Europe’s principal bond-market safe haven despite questions earlier this year about Berlin’s increased spending on defence and infrastructure. German ten-year yields fell as investors bought Bunds during the recent turbulence.

Higher sovereign yields feed into the interest costs faced by governments when refinancing debt and can affect borrowing throughout an economy. For a country already running a large deficit, rising yields make efforts to restore the public finances more difficult because an increasing share of expenditure must eventually be devoted to debt servicing.

Annual inflation in the eurozone is expected to rise to 3.3% in August 2026, from 2.9% in July, according to a preliminary estimate released on Tuesday, September 1, by the European statistical agency, Eurostat. Looking at the main components of eurozone inflation, energy prices are expected to record the highest annual increase in August (14.3%, […]

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