US Strategy Weekly: Crise Financière

Instead of focusing on Wednesday’s Nvidia Corp. (NVDA – $181.77) earnings release, Federal Reserve Governor Lisa Cook mortgage applications or the engagement of Taylor Swift and Travis Kelce (although each is important in its own way), we suggest that the financial press focus on something that could have long-term implications for all global financial markets — the crisis surrounding the French Prime Minister.

Confidence Vote on September 8, 2025

There are really important issues in the world and France is one of them. This week French Prime Minister Francois Bayrou warned that France’s debt was increasing at a pace of nearly $14 million every hour for the last 20 years* and austerity was needed to prevent a financial crisis. In France, the single biggest government expenditure is that of interest on its debt. Bayrou proposed a 2026 budget that included a slower rate of growth for government spending that would save roughly $51 billion a year. This sounds reasonable since spending would grow but at a slower pace. However, the public response was immediate and clear. Protests, strikes and demonstrations by trade unions were planned for September 10 with the goal of shutting down all of France. This week Prime Minister Bayrou announced he would call for a confidence vote on September 8 to stem the protests; nevertheless, the administration of President Emmanuel Macron is in serious crisis mode for the second time in nine months. The previous Prime Minister, Michel Barnier, was brought down in a similar way in December 2024 when the opposition parties joined forces against his budget.

In France the president is head of state and has authority on foreign policy and national security. The president appoints a prime minister who has the responsibility to run domestic affairs. Prime Minister Bayrou, 74, is a close ally of Emmanuel Macron but he is expected to lose the confidence vote since opposition parties on both the far right and left have stated they plan to eject him. Macron could move swiftly to appoint a new prime minister, but they would also risk being ousted over a budget proposal.

The problem is real. France’s debt was €3.3 trillion in the first quarter of this year, or 114% of GDP and is expected to reach 116% of GDP later this year. The country’s annual deficit was €168.6 billion ($196.0 billion) in 2024, equal to 5.8% of GDP, which puts France, the second largest country in Europe, in a worse fiscal state than Greece, Spain and Italy. As a result, the French stock market fell this week with financial stocks taking the greatest hit. French borrowing costs also moved higher, joining the highest in the eurozone, but not (yet) at levels that reflect a full-blown crisis.

Cygne Noir

In France the political will for fiscal reality does not seem likely to appear any time soon; if this is true it may take a full-blown crisis to wake up politicians. Reality is apt to be delivered by the bond market since fixed income markets have often played the role of the disciplinarian in times of financial laxity or excess. Forecasters talk about Black Swan events as if they were unpredictable; however, in France’s case, the writing may already be on the wall.

US economists should take heed. Few waved a cautionary flag in the last five years while the US deficit to GDP averaged well above 6%. It averaged 6.4% in fiscal 2024 which ended in September and soared to 7.2% of GDP when President Trump came to office in January. In our “Outlook for 2025 – A Year of Promise and Potential Turbulence” (December 23, 2024) we wrote: “Debt as a percentage of GDP currently stands at 124% …. This massive federal debt issue is the biggest risk to the bond market in a generation, and it will be a major impediment in 2025. It behooves equity investors to monitor the bond market in 2025, since it is often the precursor to stock market declines.”

We are encouraged by the fact that Secretary of the Treasury Scott Bessent has often indicated that lowering government deficits is a key priority of his team. Perhaps France’s pending fiscal crisis gives more meaning to President Trump’s unorthodox methods to reduce government debt. One of these is revenue from tariffs. Another novel idea for the US (but not for countries such as Saudi Arabia) is to establish a sovereign wealth fund to promote the long-term financial health of the US. The 10% non-voting stake in Intel Inc. (INTC – $24.35) where the US government (we the people) could get a benefit for the money invested in the company. Intel already received $2.2 billion in funding under the CHIPS and Science Act, and the additional $8.9 billion brings the government’s total investment to $11.1 billion. Much has been made in the media regarding this “transaction” but only because the media is unaccustomed to having a businessman in the Oval Office. Moreover, President Trump’s actions have been totally transparent which is not typical of most politicians or lobbyists.

The House Slump

President Trump has also been openly lobbying the Federal Reserve to lower rates. Recent housing statistics suggest this would be helpful to the economy. According to the National Association of Realtors (NAR), residential real estate affordability hit a 40-year low of 89.9 in October 2023, the lowest since October 1985. The June 2025 reading was higher at 94.4, but the lowest since July 2024. (The July report will be released on September 12, 2025 prior to the FOMC meeting.) In short, affordability is a problem in the housing industry. Much of this is due to mortgage rates, which at 6.9% are above levels seen for most of the last 23 years. Not surprisingly, in the second quarter of the year homeownership fell to 65%, the lowest percentage since the third quarter of 2019. See page 3.

There are many signs of weakness in the housing market. Softness is seen in building permits, which at 1.354 million in July matched the cyclical low reported in January 2023. Overall, total permits were down 5.7% YOY and single-family permits fell 7.9% YOY. Housing starts revived in July to 1.428 million, which was up 5.2% for the month and up 12.9% YOY. Single-family starts were 939,000, up for the month and up 7.8% YOY. But the stress in the housing market is beginning to show up in prices where new single-family home prices fell 5.9% YOY, existing home prices were flat YOY, and the FHFA latest price for June indicated that prices were decelerating, but up 2.6% YOY. See page 4.

July construction data will be released next week and since June’s release displayed weakness it will be important to see if this was a short-term phenomenon or the start of a longer-term trend. In June, the annualized rate for total construction was $2.14 trillion, down 2.9% YOY. Total residential construction was $895.1 billion, down 6% YOY. For total construction, this was the longest negative YOY stretch since early 2019. This is a concern; however, we expect that new tax law changes which allow for full expensing of capital expenditures in each tax year will boost construction in the second half of the year.

The technical condition of the equity market improved in recent days, and the NYSE advance/decline line made a new high with the DJIA on August 22, 2025. However, upside volume remains neutral, and this implies the current rally is at risk of a pullback. We would be buyers on any weakness. *https://www.wsj.com/opinion/france-budget-debt-francois-bayrou-emmanuel-macron-economy-6a5ca406

Gail Dudack

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