Lagarde points to Paris

Speaking at a CNN event in Bangkok on Wednesday, 14 October, on the sidelines of the IMF and World Bank annual meetings, European Central Bank President Christine Lagarde said the answer to France's bond problems lies with Paris. Asked whether the ECB was about to help France, she said it was up to the French government to calm investors. French government bonds have been among the hardest hit by a global selloff, as investors worry that political wrangling before next year's presidential election could hamper efforts to cut the country's high deficit.

“There are particular circumstances that lead to some countries being more affected, France being a case in point.”

She added that the primary and first solution lies at home in France and concerns fiscal policy. Analysts have spent weeks speculating whether the ECB might buy French bonds under its Transmission Protection Instrument, a tool that can be activated when a country faces market pressure the ECB considers unwarranted and disorderly. Marine Le Pen has asked the ECB to help France through that instrument. Portugal's central bank governor, Álvaro Santos Pereira, said earlier in October that the ECB's mission is to control inflation and that France's problem must be resolved through deficit reduction and structural measures.

Budget 2027 under strain

The National Assembly began examining the 2027 budget on Tuesday, 13 October, with the government aiming to bring the deficit back to 5% of GDP next year. Adoption looks uncertain because parliament lacks a majority and next year's presidential election is approaching. Meanwhile, France's 10-year borrowing rate is approaching 5%. Bank of France governor Emmanuel Moulin, also in Bangkok, had urged lawmakers and the executive earlier on Wednesday to "take their responsibilities" on the budget. He noted that the French constitution contains provisions allowing a budget to be adopted even without a parliamentary majority, an apparent reference to Article 49.3 or to ordinances.

Inflation, rates and funding

Lagarde said euro zone inflation has been driven "predominantly, but not exclusively" by an energy price surge caused by the Iran war. She saw no sign yet of second-round effects on other prices, but said the ECB would look for hints such as trade unions' demands in wage talks.

“We cannot wait until they're there in full view, but we can anticipate.”

The ECB has raised rates twice in the past four months, and markets expect a further increase in December, when the bank updates its macroeconomic projections. Lagarde called the IMF's forecast of 1.1% GDP growth for the euro zone this year "not brilliant" but "not a bad outcome". At an Atlantic Council event she said competition for financing is very strong, greater than in a long time, as large technology companies seek long-term capital to build artificial intelligence.