France Faces Austerity Push Amid Rising Bond Yields and Eurozone Fears

France's political parties are locked in a fierce debate over austerity measures as government bond yields hit a 24-year high, raising concerns about the country's national debt and its impact on the eurozone. The far-right National Rally, led by former presidential candidate Marine Le Pen, plans to propose a budget cutting government spending by about 25 billion euros annually. Meanwhile, the governing centrist alliance has submitted a budget aimed at narrowing the fiscal deficit to 5.0% of GDP from 5.4% this year, including measures like freezing civil servants' pay and scrapping inflation-linked pension benefits.

The gap between 10-year government bond yields in Germany and France widened to more than 1.52 percentage points last week, the largest since 2011, partly causing the euro to fall to its lowest level in 17 months. Emmanuel Moulin, governor of the Bank of France, warned that markets would be relieved if a French austerity budget passed but cautioned that high interest rates could suffocate the country if it failed to act.

Some market participants argue that the European Central Bank (ECB) may need to intervene, suggesting it should stop raising policy rates, activate its Transmission Protection Instrument for bond purchases, and halt quantitative tightening. However, the biggest challenge remains public opinion, with massive protests against austerity measures ahead of the presidential election in May next year. The National Rally is also campaigning on pledges that would increase the fiscal burden, such as raising the retirement age and cutting taxes on essential goods.