French student movement pauses, pressure mounts over budget impasse

France’s student movement took a breather on Wednesday after weeks of turmoil, but market pressure on the French government intensified ahead of crucial budget negotiations starting next week.

Student rallies, now in their third week after violent clashes with police, school closures and thousands of arrests, are expected to resume on Thursday. What began as student protests in Paris to pressure the government to address teacher shortages, long school hours and abandoned schools has blossomed into a nationwide movement that draws support from people of all ages.

Prime Minister Sébastien Lecorne said Wednesday morning that authorities would use the pause in demonstrations to begin dialogue with high school students. He is scheduled to address the nation Wednesday night.

“(Student) demands are numerous and vary from high school to high school. They must be objectively evaluated on a school-by-school basis,” he said in a post on X on Tuesday. “Substitutes, the condition of the building, instruction, the structure of class time, high school democracy, all topics need to be on the table.”

But he added that dialogue must be held “without giving in to political manipulation.”

The L’Ecornu government accused the radical leftist party La France Insoumise (LFI) of hijacking the student movement. Some of the party’s current politicians have publicly supported the student movement.

LFI did not respond to CNBC’s request for comment.

The unrest in France has highlighted and exacerbated the economic and political challenges facing the country.

In the coming weeks, the French government faces tough budget negotiations in which it must persuade members of a politically divided parliament, including the far-right National Rally, the left-wing New Popular Front and L’Ecornu’s centre-right group, to agree to fiscal adjustments worth tens of billions of euros.

In France, a snap election in July 2024 failed to secure a majority in parliament, and a dispute over the budget sparked political discord that led to two governments being overthrown by votes of no confidence. It took incumbent leader Lecorne until February of this year to pass the 2026 budget, which he did only through the use of emergency legislation that allowed him to bypass parliament and force the policy through.

Further political changes are expected after next spring’s presidential election, with far-right candidate Marine Le Pen currently the frontrunner. In a speech on Tuesday, Le Pen promised to cut France’s budget deficit to 3% within 18 months of the election if she wins, but critics questioned whether her plan was achievable. France’s budget deficit exceeded 5.1% of GDP last year.

Political instability, concerns about the budget deficit and doubts about whether the minority government will be able to make the necessary scale of spending cuts are also spooking investors trading French government bonds. Yields on French government bonds, known as OAT, have risen to multi-decade highs this year, raising concerns that the country is headed for a sovereign debt crisis.

Bond yields and prices move in opposite directions.

Bank of France Governor Emmanuel Moulin, a member of the European Central Bank’s board, poured cold water on the idea that France may soon need support from European Central Bank policymakers in Frankfurt.

He told radio station France Inter that the ECB does not exist to “deal with the fiscal problems” of countries.

“This is to fight inflation and keep the inflation rate around 2%,” he said. “So the conditions for ECB intervention are not in place today.”

French benchmark yield 10 years OAT It rose 16 basis points on Wednesday, sharply rebounding from the previous day’s decline. The 10-year OAT yield has risen more than 100 basis points since the beginning of the year.

Emmanuel Roman, chief executive of asset management giant Pimco, told French newspaper Le Monde that the “situation” in France’s bond market is “critical” and that this “sends a serious signal” to the government.

“We need to reduce the deficit. We need a budget and that budget needs to be passed,” he said in an interview published Wednesday. “France needs a reliable political policy, which it currently lacks.”

Roman added that the country “needs reforms like the ones Italy had to carry out when its back was against the wall.”

“We need to take serious measures immediately,” he said.

Anthony Brinkman, high-yield portfolio manager at Principal Asset Management, told CNBC in an email Wednesday that the French bond market could still come under further pressure.

“We remain cautious about French credit. OAT’s decline does not appear to be running out and we do not believe the curve has found a clearing point,” he said.

“Rather than market disorder, this appears to be once again pricing in deteriorating fundamentals, with worsening fiscal deficits and negative news on the debt-to-GDP outlook. Ratings from both Moody’s and S&P are expected in the fourth quarter, and downgrades could add to selling pressure.”