France’s 10-year borrowing costs on Tuesday climbed to highest level compared with Germany in a year and a half barely 24 hours after the French President, Emmanuel Macron, announced spending measures in a bid to restore calm after weeks of violent protests.
President Macron had on Monday announced wage rises for the poorest workers and tax cuts for pensioners, measures that are expected to increase public spending by 8 billion to 10 billion euros.
Reuters reported that France’s 10-year bond yield rose by five basis points on Tuesday as a result of the fiscal measures, noting that the spread over equivalent German bonds hit 47.5 basis points, its widest level since May 2017.
Commenting on the fiscal measures and the implications for the economy, Commerzbank rates strategist, Rainer Guntermann said: “The measures suggest there will be more spending from the French government, which implies a higher deficit in 2019 and weakens the financial position.
“French newspapers suggesting this morning that we could have a 3.5 per cent deficit in France in 2019, which complicates the discussion in the euro area and gives other countries such as Italy an argument for a higher deficit”, he added.
According to the online medium, French newspaper reports cited officials as saying the measures could push the country’s budget deficit to 3.5 percent of the GDP, this is aside any spending cuts or tax increases that may be announced.
On whether the budget deficit would be kept below the euro zone’s limit of 3 per cent of GDP, an Elysee official was quoted as saying that France has some room on spending if a one-off tax rebate, which inflates the deficit by 20 billion euros in 2019, is not taken into account.
Earlier this year, the European Commission had rejected Italy’s draft budget, which provided for a deficit of 2.4 per cent of GDP in 2019, up from 1.8 per cent this year.
However, La Republica newspaper reported on Tuesday that the Commission was willing to accept an increase in Italy’s deficit target to 1.95 per cent for next year.
On Tuesday, Italy’s 10-year government bond yields were up 3.5 basis points at 3.13 percent as the spread over Germany widened to 287 bps.
