With eight months to the French presidential vote, markets are showing stress: France’s borrowing premium over Germany has climbed to levels close to the highs seen during the 2012 European sovereign-debt crisis. Investors are focused on who will succeed pro-business centrist Macron and how they would tackle a >5% fiscal deficit, rising debt servicing costs and growth teetering near recession. Front-runners on the extremes — Marine Le Pen on the right and Jean-Luc Mélenchon on the left — propose

With eight months to the French presidential vote, markets are showing stress: France’s borrowing premium over Germany has climbed to levels close to the highs seen during the 2012 European sovereign-debt crisis. Investors are focused on who will succeed pro-business centrist Macron and how they would tackle a >5% fiscal deficit, rising debt servicing costs and growth teetering near recession. Front-runners on the extremes — Marine Le Pen on the right and Jean-Luc Mélenchon on the left — propose sharply divergent fiscal programmes, including higher spending, lower retirement ages, partial debt forgiveness and even stopping France’s contributions to the EU. Gavekal Research CEO Louis-Vincent Gave says, absent a parliamentary majority, fiscal space or political capital, it is unclear how the government could staunch fiscal deterioration and the risk is that the bleed accelerates. The 15-year French government yield, viewed as less affected by short-term monetary policy, and its spread to the German same-tenor rate are near post-2012 peaks, signalling markets are pricing a structural deterioration in France’s long-term fiscal position relative to Germany.