France-Germany spread breaks 150 basis points again! Streets demand better livelihoods, bond market urges France to deliver on deficit reduction.

ECB Governing Council member and Bank of Finland Governor Olli Rehn said that the yield spread between French government bonds and German government bonds has continued to "widen somewhat," driven jointly by rising global long-term government bond yields and the country's specific fiscal crisis. Rehn emphasized that expanded private investment such as AI and government deficits are together increasing capital demand; France additionally faces the risk of budget consolidation being blocked. The latest remarks by this ECB Governing Council member also highlight that the French bond market is simultaneously bearing rising global financing costs and a re-evaluation of the country's fiscal creditworthiness, and France is very likely to be the strongest flashpoint for igniting a new round of the European debt crisis. Speaking to the Finnish parliament on Tuesday, Rehn said many other countries have also experienced similar market pressure. The extra government bond yield investors demand for holding French 10-year government bonds rather than safer German government bonds has broken through 150 basis points, rising to 153 basis points, the widest level since October 2. "Sovereign bond yields are mainly driven by two factorsincreased private-sector capital demand and expanded public-sector deficits, both of which push up the cost of capital," Rehn said in response to lawmakers' questions, citing large-scale investment by artificial intelligence companies as an example. "All euro area countries must control public fiscal deficits to ensure debt sustainability," he said. "This applies equally to France and Finland." The French government has been struggling to control its huge budget deficit and debt scale. Currently, protests over the cost of living and looting incidents have brought new challenges to the government. Because this round of market pressure stems from France's own increasingly large fiscal deficit problem, the European Central Bank is unlikely to step in to help. ECB rate hike expectations have not faded, and the French government bond system still has to pay a "fiscal credit premium" The French bond market is simultaneously bearing rising global financing costs and a re-evaluation of the country's fiscal creditworthiness. Rehn emphasized that expanded private investment such as AI and government deficits are together increasing capital demand; France additionally faces the risk of budget consolidation being blocked. On October 20, the yield on French 10-year government bonds rose to about 4.96%, approaching the 24-year high set earlier this month; the France-Germany spread once again broke through 150 basis points. All of this means France's financing pressure is clearly exceeding what can be explained by common euro area interest rate factors. ECB policy expectations remain "pause in October, hike again in December": in an institutional survey of economists covering the European market conducted on October 8, nearly 90% of economists expected a 25 basis point rate hike in December, taking the deposit rate from 2.50% to 2.75%. But ECB President Lagarde pointed out on October 17 that the tightening of financing conditions caused by the bond selloff will suppress growth and inflation. This means subsequent decisions need to weigh both energy price pressures and the tightening already implemented by the bond market. The streets demand better livelihoods, the bond market demands delivery on deficit reduction Looking back at the previous round of the European debt crisisat that time, Greece sharply revised up its fiscal deficit in 2009, and the post-financial-crisis recession and bank bailout burden further exposed member states' fiscal fragility, with pressure subsequently spreading to Ireland, Portugal, Spain and Italy. Falling government bonds weakened bank assets and financing capacity, and bank bailouts in turn increased the government burden, forming a "sovereign-bank vicious cycle"; fiscal austerity further depressed growth. European rescue mechanisms were gradually established, especially after then-ECB President Draghi pledged in 2012 to defend the euro "whatever it takes" and the ECB launched the conditional Outright Monetary Transactions (OMT) tool, only then did market confidence gradually recover. This time, the European debt crisis alarm first points to the core economy of the euro areaFrance. The French government expects a fiscal deficit ratio of 5.4% in 2026, with the 2027 target still at 5.0%; public debt is expected to rise to 119.3% of GDP this year, and interest expenditure is expected to increase from 79.2 billion euros this year to 91.2 billion euros next year. Financing costs are squeezing the room for fiscal adjustment, while deficit reduction itself faces social resistance. Recent street unrest, clashes and protests in France mainly stem from rising living costs and deteriorating school conditions, with riots and looting in some areas; their financial impact lies in further weakening the government's ability to implement budget measures. This may create a feedback loop of "consolidation blockedrisk premium risesdebt rollover financing costs increase." The ECB's transmission protection tool mainly targets disorderly market pressure disproportionate to fundamentals and must assess debt sustainability and fiscal policy. Therefore, a sustained repair of French bonds requires credible budget execution and cannot rely solely on betting on central bank bond purchases.