A senior German central bank official said the recent wave of bond selling in Europe is a “clear warning signal” that investors are concerned about governments’ efforts to control their debt.
Michael Theurer, a member of the executive board of the German Federal Bank, told German radio station Deutschlandfunk: “The current situation shows that fiscal and political uncertainty is affecting government bond markets. While there is no systemic sovereign debt crisis yet, the risks have clearly risen.”
French bond markets have been severely hit amid growing concerns over France’s political and economic challenges. The turmoil has spread to other heavily indebted eurozone countries, prompting speculation that the European Central Bank may ultimately need to intervene to contain the crisis.
Jean-Luc Mélenchon, a far-left radical, said he would sue Emmanuel Muçtar, the head of the French central bank, for treason if he wins the upcoming election.
Investors are responding to the current political and economic crisis by selling off French bonds. Since late May, the yield premium on 10-year French government bonds compared to German bonds has more than doubled. Last week, this spread reached its highest level since the 2011 eurozone debt crisis.
Theurer believes that policymakers in France and across the eurozone appear “very aware of the stakes involved.”
France’s finance minister, Roland Garros, proposed a budget plan allocating 43 billion euros (approximately 48.2 billion dollars) to reduce the deficit and reassure investors. In Italy, the government cut defense spending at the final stage of its budget proposal in an effort to narrow the fiscal gap.
“Now is not the time to discuss intervention by the European Central Bank,” Theurer said. “We do not see any fundamentally unsustainable trends in financial markets that would justify ECB intervention.”
He reiterated the call made this week by International Monetary Fund Managing Director Kristalina Georgieva, urging governments to take urgent action to address multiple challenges, including record-high debt levels. Georgieva told Bloomberg Television that the pandemic, along with rising spending due to conflicts in Ukraine and the Middle East, has pushed some countries “out of the safety zone.”
Like the IMF, the German Federal Bank is calling for a medium-term strategy to review spending and focus it on investments that promote growth.
“This is exactly what the German Federal Bank recommends,” Theurer said. “Germany’s fiscal position is much stronger than that of other European and global countries, but our debt is also increasing—so we should advance fiscal consolidation as soon as possible.”
