Market Pressure on France's Budget Deficit

FRANKFURT (Reuters) – A surge in market pressure on France due to concerns over its budget deficit has been "limited" and is part of the normal functioning of euro zone bond markets, according to the European Central Bank's chief economist, Philip Lane.

A series of political crises this year has rattled investors in French government bonds, highlighting the country's budget issues, with the premium demanded by buyers rising to its highest level since a debt crisis 12 years ago.

While the ECB has tools to mitigate debt market fires, Lane downplayed the likelihood of immediate action to cap the spread between French bond yields and those of Germany.

> "What you talk about there, in the end, has been fairly limited," Lane said at an event hosted by Market News International. "(It has been) noticeable, trackable, but it's part of the euro area design that spreads respond to evolving beliefs about future fiscal fundamentals."

The ECB can deploy its Transmission Protection Instrument to buy any amount of a country's bonds if unwarranted spread widening occurs.

New French Prime Minister Francois Bayrou stated upon his appointment last week that he faces a "Himalaya" challenge in addressing France's deficit, which he described as a moral issue, not just financial.

Many euro zone governments, as well as the United States, have been running oversized deficits since the pandemic, with spending expected to continue at a lower pace to support rearmament and the transition to a greener, more digital economy.

Speaking about increasing calls for central banks to support this spending, ECB policymaker Pierre Wunsch remarked that governments should not expect "money falling from the sky." He emphasized, "We're not going to make up for what's difficult on the political front. We need to give democracy a chance and not try to find a solution with money falling from the sky. It ends badly."