France is enjoying a good crisis. The country's funding costs are at record lows. But this may not last if new president François Hollande's policies disappoint markets.
The election of France's first socialist president in over two decades could have given markets an excuse to pounce. The opposite has happened. As the Greek situation has worsened, French 10-year yields have fallen to their lowest levels since the euro crisis began. Ten-year spreads over Bunds fell roughly 30 basis points this past week, to 110 basis points. Compare that to the peak of the crisis in November last year, when rising contagion drove spreads to a record 180 basis points, suggesting that France could at some point be hit by the contagion wave.
Markets so far have seen the best side of Mr. Hollande. He used the recent euro zone summit to verbally promote a badly needed growth agenda for the single currency, and he has avoided escalating tensions with Germany. In reality he has few concrete results to show for his efforts, but at the very least he has broadened the policy debate.
But France's recent strength owes less to Mr. Hollande than it does to Greece and Germany. Fears of a Greek exit have pushed German yields to levels that make it hard for investment managers to earn any return, forcing them to look elsewhere for relative safety. That is why yields of all non-peripheral euro zone countries like France, Austria and Belgium have come down, helped by a wave of buying from Asian central banks. As yields fell, investors who had taken the opposite side were forced to cover their bets, driving them down further.
With yields this low, it wouldn't take much for markets to train their sights on France again. Mr. Hollande has vowed to balance France's budget for the first time in over 30 years by 2017 by limiting spending and increasing revenues. He is counting on growth of 1.7 per cent in output next year – whereas Citigroup, for example, is forecasting a much more pessimistic negative 0.1 per cent.
That could be ambitious given France's stagnating competitiveness, which Mr. Hollande has yet to address, and the risks of a Greek exit, to which French banks and exporters are exposed. Investors will have to wait until Mr. Hollande's first budget in July to get a better measure of his ability to steer France through the storm.