French Markets React to Political Turmoil Over Budget Cuts

France's CAC 40 index dropped sharply, losing 2% in early trading before settling 1.6% lower, as Prime Minister Francois Bayrou faces mounting opposition to his €44 billion austerity plan. The proposed cuts—aimed at curbing a deficit that reached 5.8% of GDP in 2024—include freezing welfare and pension spending, axing two public holidays, and adjusting tax brackets. Bayrou framed the measures as necessary to avoid "over-indebtedness," citing decades of accumulated debt and external shocks from financial crises to geopolitical conflicts.

Political backlash was immediate. The Socialist Party's Pierre Jouvet declared outright opposition on social media, signaling a potential government collapse. With all major factions rejecting the September 8 vote, the turmoil underscores France's fragile fiscal path—a scenario markets are pricing in with heightened volatility.