France’s political instability, underscored by the recent fall of the Barnier government, has sent shock waves through its economy. This budgetary deadlock, coupled with rising public debt and underperforming markets, poses critical challenges – and potential opportunities – for Israeli investors seeking to navigate this turbulence.
The political impasse stems from a deeply divided National Assembly, split among the far-left Nouveau Front Populaire (NFP), the far-right Rassemblement National (RN), and a centrist bloc.
Michel Barnier’s proposed budget, designed to cut €40 billion in public spending and raise €20 billion in taxes, was rejected by both extremes. This unprecedented deadlock culminated in the first parliamentary censure of a government since 1962.
Adding to the uncertainty, the Assembly cannot be dissolved before mid-2025, leaving investors facing a prolonged period of instability. Possible scenarios range from President Emmanuel Macron’s resignation to the potential rise of Marine Le Pen, outcomes that could dramatically reshape France’s economic policies and investor confidence.
The economic indicators further underscore the gravity of the situation. France’s public deficit is forecast to reach -6.1% of GDP in 2024, with public debt climbing to 113% of GDP, among the highest in Europe. For context, the EU average for public debt is 84%, and Germany’s stands at just 65%. This stark fiscal imbalance is compounded by public spending that accounts for 57% of GDP – far above the EU average of 49% and Israel’s 41%.
Investor confidence has been shaken. French 10-year bonds now yield 2.9%, higher than Spain’s 2.75%, reflecting a widening spread with German Bunds. Moody’s has already downgraded France’s rating to Aa3 from Aa2. Meanwhile, the equity markets mirror these challenges. The CAC 40 index has underperformed its European peers, losing 4.4% since June 2024, compared to a 10.3% gain in Germany’s DAX.
This trend, epitomized by the slogan “Anything But France,” highlights a widespread aversion to French assets, regardless of fundamentals. For instance, LVMH, which derives only 8% of its revenues from France, has seen its stock drop 16% since June.
Situation presents a paradox for Israeli investors
For Israeli investors, this situation presents a paradox. While the political crisis introduces significant risks, it has also depressed valuations in key sectors such as luxury goods, industrials, and energy transition. These conditions create potential entry points for those with a long-term perspective.
France’s borrowing needs exacerbate the challenges. The country must borrow over €300 billion in 2025, a record in Europe. Rising yields will increase borrowing costs, impacting corporate and sovereign debt markets alike. Despite this, certain sectors show resilience. The luxury goods market, heavily reliant on international sales, could rebound with a recovery in Chinese and US consumer demand.
Likewise, industrials benefiting from Europe’s energy transition plans remain attractive. Moreover, geopolitical shifts could play a stabilizing role. France’s crisis might prompt Germany and the EU to relax fiscal constraints, boosting demand for French exports. A coordinated European bond issuance for defense or technological investments could also inject much-needed stability.
History offers a note of cautious optimism. France has weathered crises before – in 1958, 1968, and 1981 – and emerged stronger. However, today’s interconnected global economy demands quicker and more decisive action. France’s challenge lies in balancing fiscal discipline with social stability while restoring investor trust.
For Israeli investors, this crisis underscores the importance of strategic diversification and a disciplined approach. Focusing on fundamentals, seeking high-quality corporate bonds and equities in resilient sectors, and hedging against European volatility with exposure to US and Swiss markets are prudent strategies. Staying attuned to political developments and their impact on fiscal policies will also be crucial.
At Edmond de Rothschild, there is a belief in the long-term resilience of the French economy. While caution is warranted in the short term, France’s skilled workforce, global companies, and strong institutional framework provide a foundation for recovery. For those prepared to navigate the risks, this crisis may present unique opportunities to leverage undervalued assets and capitalize on the changing dynamics in Europe.
The writer is CEO of Edmond de Rothschild (Israel) Ltd. The global investment research team at Edmond de Rothschild Bank in Geneva contributed to this article.