News late yesterday (4 December) that the French government had collapsed was about as surprising as a sandcastle collapsing under an incoming tide, says Lindsay James, investment strategist at Quilter Investors.
Marine Le Pen’s National Rally confirmed on Monday that it would support the vote of no confidence, ensuring it would pass. Consequently, the market reaction was limited, with French 10-year government bond yields remaining stable and the equity market inching slightly higher. However, this situation could take time to resolve, and investors' patience may wear thin.
The French economy is facing significant challenges. Unemployment is at 7.4%, the fiscal deficit is twice the EU's acceptable limit, and there is no agreed plan to close the gap.
Political infighting is likely until a new election can be called next July. This instability is exacerbating structural problems seen across Europe, including difficult demographics with a shrinking working-age population, an over-reliance on uncompetitive manufacturing, a heavy public debt burden, and divided governments. These issues are increasingly driving investors to look elsewhere.
