Core Insights - The resignation of French Prime Minister Sébastien Lecornu exacerbates the already challenging economic outlook for France, primarily due to the government's inability to secure a parliamentary majority for necessary fiscal reforms [1] - France's budget deficit exceeds 5% of GDP, and its national debt approaches 114% of GDP, indicating significant fiscal imbalance compared to historical standards and other Eurozone core countries [1] - The rise in French government bond yields reflects increased governance risk premiums, with the 10-year bond yield surpassing that of Italy, a situation previously considered unimaginable [1] - The widening spread between French and German 10-year government bonds has exceeded 0.85 percentage points, signaling a loss of market confidence in France's political decision-making capabilities [1] Economic Implications - The ongoing political instability in France complicates the European Central Bank's (ECB) policy outlook, as it must balance high inflation with sluggish economic growth in the Eurozone [2] - The widening bond yield spread between France and Germany may hinder the ECB's ability to effectively transmit its monetary policy across the Eurozone, potentially leading to market fragmentation and systemic risks [2] - The turmoil in France is also impacting the UK, with rising UK bond yields as it competes for financing in global capital markets, indicating that the situation in France could have broader implications for European financial stability [2] Potential Risks - The ECB's strong backing could provide some protection for France, reminiscent of Mario Draghi's "whatever it takes" commitment during the European debt crisis, but the situation remains precarious [3] - The Bank of England may also need to intervene if UK bond market sentiment deteriorates significantly, but such actions could be perceived as monetizing the UK's ongoing fiscal deficits, risking the central bank's credibility [3] - The upcoming UK fiscal budget in November will be critical, as failure to achieve fiscal consolidation could lead to a more severe situation than that faced by France [4]