Euro zone ministers to tell France to pass 2027 budget to calm markets

Eurozone Ministers, ECB Press France to Approve 2027 Budget Amid Bond Turmoil

France’s Fiscal Challenges and Eurozone Response

By Jan Strupczewski

Bond Market Turmoil and Rising Borrowing Costs

BRUSSELS, Oct 8 (Reuters) - Euro zone finance ministers and the European Central Bank are set to tell France on Thursday to pass a 2027 budget to calm bond markets, as French borrowing costs hover at 25-year highs, senior euro zone officials said.

France is at the centre of a bond market storm on worries over the country’s large budget deficit and looming 2027 presidential election.

Its 10-year bond yield has jumped nearly 80 basis points (bps) since the start of September and hit its highest level since July 2002, just short of 5%. That is driving up borrowing costs and making the fiscal maths harder.

Upcoming Eurogroup Meeting

Euro zone finance ministers and the ECB meet in Luxembourg on Thursday afternoon for monthly talks and the surge in French borrowing costs will be discussed, euro zone officials involved in the preparation of the meeting said.

Official Statements and Expectations

But asked if either the European Commission or ECB would respond in any way, a senior euro zone official said:

"I think the clear answer is "no". I would expect the Eurogroup to recognise that France has all the means to respond. The proper response is to agree on a budget. That's kind of a no-brainer. So I would expect this to be the main message," the official said.

ECB’s Role and Limitations

The European Central Bank can buy bonds of a euro zone country on the secondary market if their prices move in an unjustified way to protect the proper transmission of monetary policy. But officials said this did not cover what was happening in France.

"Everybody has their own mandate. The European Central Bank has a mandate to maintain price stability, and governments have a mandate to maintain the fiscal stability of their countries. Everybody should do their own job," a second senior euro zone official said.

France’s Budget Deficit and Political Challenges

France said in September that its budget deficit will overshoot the government's 5% target this year. 

The government has announced tightening measures to bring some calm, but investors are sceptical they can be carried out because of the fragmentation of the French parliament and presidential and parliamentary elections in April and May 2027. 

France also plans to sell a record €340 billion ($381 billion) of bonds in 2027 to fund the government and refinance COVID-era debt.

Potential Contagion and Historical Context

Euro zone officials said that there was concern about French borrowing because it created conditions for a broader crisis, but there was no sign of contagion yet to other euro zone countries.

Since the creation of the euro currency in 1999, France -- the European Union's second biggest economy and a key political player -- has only had a budget deficit below the EU's ceiling of 3% six times. Some officials said that debt markets were probably the only factor that could force it to consolidate.

(Reporting by Jan Strupczewski; editing by Philip Blenkinsop)