France proposes various "deficit reduction" plans, the sell-off in European and US government bonds pauses.

Title context: France proposes various "deficit reduction" plans, the sell-off in European and US government bonds pauses. Text: France has recently put forward a series of deficit reduction plans in quick succession, attempting to reverse its steadily deteriorating fiscal situation, and pressure on the French bond market has temporarily eased as a result. The yield on France's 10-year government bonds fell by about 12 basis points on Tuesday to around 4.75%, and the spread with German bonds of the same maturity also narrowed. The French government plans to keep next year's deficit within 5% of GDP by cutting spending and controlling pension expenses; Le Pen's National Rally has proposed a "shadow budget" that would cut more than 140 billion euros in spending, reduce next year's deficit to 3.7%, and further lower it to 2.2% by 2032. However, whether these plans can actually be implemented still faces major obstacles. The government may need to invoke Article 49.3 of the constitution to bypass parliament and push through the budget, while also facing parliamentary opposition and escalating street protests; Le Pen's plan is merely a policy vision for after her party comes to power and would still require support from other parties to be implemented. The French government is prepared to use constitutional tools to cut spending According to The Wall Street Journal, French Finance Minister Roland Lescure said the government is willing to negotiate over the budget content, but there are two red lines: keeping the budget deficit within 5% of GDP while avoiding measures that harm economic growth. If parliamentary negotiations reach a deadlock, the government is prepared to invoke Article 49.3 of the French constitution to bypass the National Assembly and directly push forward a spending cut plan totaling about 43 billion euros (about 48 billion US dollars). "We will use every means," Lescure said. Article 49.3 allows the government to advance legislation without a final vote in parliament, but lawmakers can counter by filing a motion of no confidence. If the motion passes, the government will be forced to step down, and the budget bill will also collapse. Lescure said that even if the government judges that it cannot survive a no-confidence vote, it can still advance the budget through a series of executive orders 70 days after the budget bill is submitted and before a final vote is held. "This is a guardrail," he said. "There is always a backup plan." Pensions are one of the main points of contention in the budget negotiations. Lescure proposed reducing the adjustment of pensions linked to inflation, and pointed out that pension spending rose 5.4% in 2024, an increase of about 15 billion euros. If no measures are taken, pension spending is expected to increase by another 15 billion euros next year. Lescure also disclosed that special provisions have been added to the budget to allow the winner of next spring's election to revoke some budget measures, including pension-related provisions, in exchange for limited support from Le Pen and Jean-Luc Mlenchon's camps. Le Pen proposes a more radical "shadow budget" Compared with the government, the fiscal consolidation plan proposed by Le Pen is more radical. She plans to cut more than 140 billion euros in spending, reduce next year's deficit to 3.7% of GDP, below the government's 5% target, and further lower it to 2.2% by 2032. Specific measures include compressing domestic spending, reducing transfers to the European Union, and cutting immigration-related spending. UBS market analyst Nana Antiedu said that after Le Pen announced the "shadow budget," French government bonds continued to outperform, with the 10-year OAT yield falling 12 basis points to 4.74%. However, she also pointed out that this is still only a shadow budget and represents the policy intentions of Le Pen's party if it comes to power in the future. Even if the National Rally wins the 2027 presidential election in the future and completes the relevant legal procedures, reducing the deficit to below 3% by 2032 would still require support from other parties. Rich Privorotsky, head of Goldman Sachs' trading desk, believes that the OAT market has already priced in a lot of good news in advance, so there is limited room for further improvement, and the key lies in whether Le Pen's fiscal plan can gain market trust. He said that if Le Pen can propose an executable plan to stabilize debt without touching pension commitments, the credibility of her fiscal plan may be higher than the market expects. But at the same time, if France reduces its financial support for the European Union in order to tighten domestic finances, it could also bring new pressure to fiscal coordination within Europe. Protests increase resistance to fiscal austerity While the French government pushes forward with budget cuts, it also faces pressure from the streets. According to The Wall Street Journal, nationwide student protests have continued to spread since last month, with more than 260,000 participants on Tuesday alone, including students, parents, and teachers, and hundreds of high schools blocked. In some areas, protests turned into violent clashes, with demonstrators burning trash bins, damaging bus stops, and throwing objects at police, while police used batons and tear gas in response. French authorities said more than 200 students have been injured in the protests. Protesters are demanding repairs to aging school buildings, smaller class sizes, and more teachers, while opposing the budget cuts proposed by Lescure. Although the government plans to increase education funding by 1.2 billion euros, it also plans to cut more than 1,500 teaching positions as student numbers decline. On the political level, Le Pen called the government's budget plan "both ineffective and unfair," but when asked about the National Rally's negotiating red lines, she was relatively cautious. "The pressure from the bond market is already so great that we cannot set any more limits," she said at a news conference. Left-wing leader Mlenchon criticized Le Pen's fiscal plan as a compromise with financial markets, arguing that austerity measures could weaken the economy and further worsen public finances. The head of G10 foreign exchange strategy at ING Bank said that the continued weakening of the euro against the US dollar and other major currencies reflects the market's demand for a higher euro risk premium due to France's fiscal difficulties. This article is reprinted from "Wallstreetcn," author: Li Jia; GMTEight editor: Zheng Yuyang.