French markets will be “upset” if the country’s new government does not adhere to the European Central Bank’s new fiscal rules, Luis de Guindos, the institution’s vice president, said on Tuesday.
De Guindos told CNBC’s Annette Weisbach that last month’s French bond market moves had not been a cause for concern that would require an ECB intervention.
“What we have seen so far is that the evolution of [French] markets has been quite orderly,” he said in an interview at the ECB Forum on Central Banking in Sintra, Portugal.
“We have seen a little bit of widening of spreads, but the situation has been under control in that respect.”
The premium on the country’s borrowing costs compared to Germany’s has recently been trading at its highest level since 2012. France’s benchmark 10-year government bond yield has risen above 3.3%, roughly a 12-month high, since the snap election was called by President Emmanuel Macron in the middle of June.
A first-round vote over the weekend was topped by the far-right National Rally party, but analysts said the split suggested a potential hung parliament in the second round on Sunday. This was viewed as a favorable fiscal result by many investors, who are concerned about the tax and spending proposals of both the far right and the far left.
De Guindos’s messaging echoed that of ECB Chief Economist Philip Lane two weeks ago, when he said June’s French bond sell-off had not been “disorderly.”
“I think that this is not about monetary policy, this is about fiscal policy,” De Guindos told CNBC on Tuesday.
“The reason why, you know, markets would be upset … for any government, not only for France, is that fiscal policy does not adapt to the [ECB’s] new fiscal framework,” he continued.
“So I think that the key factor here is going to be to fully respect the fiscal framework that was agreed at the beginning of this year.”
The framework released in March requires EU member states with public debt ratios above 60% of GDP or deficits higher than 3% of GDP to submit a four-year fiscal plan to the European Commission, the EU’s executive arm.
Even under the current business-friendly centrist government led by Prime Minister Gabriel Attal, an ally of Macron, the Commission in June issued a reprimand to France and six other countries for their high budget deficits. France’s debt to GDP ratio was 110% last year.
“We will fully respect the outcome of any electoral process,” De Guindos said.
“Let’s see, but … so far, the evolution of markets has been quite ordinary. We have not seen any, let’s say, turmoil, or chilblains in markets.”
“Even if you look at the markets yesterday and the day, you know, today, well, you know, the situation is a little bit more calm than before.”
Anna Titareva, European economist at UBS, told CNBC’s “Squawk Box Europe” on Tuesday that the first-round French election outcome was taken “somewhat positively” by the market.
“It seems that the risks of the far-left coalition of parties is now being somewhat priced out. Also, in terms of the rhetoric from the far-right party, [it] seems to be toned down a bit in terms of potential conflicts with the European Commission regarding the fiscal outlook.”
“When we think about ECB [bond market] intervention, they’ve got various tools available,” she continued, including its Transmission Protection Instrument and Outright Monetary Transactions.
“But they’ve been emphasizing that they would react only in the case of disorderly market reaction. That’s not what we currently observe. So at the moment, it seems that there’s little incentive for them to get involved.”