International investors woke up this week to a storm of political and economic upheaval, as France’s government collapsed in a dramatic no-confidence vote and Japan’s prime minister resigned after a stinging electoral defeat. The fallout from these events is rippling through global markets, raising fresh concerns over fiscal stability, bond markets, and the prospects for growth—not just in Europe and Asia, but around the world.
France, the euro zone’s second-largest economy, finds itself in the eye of this storm. On September 8, 2025, Prime Minister François Bayrou’s minority government was toppled by a decisive 364-194 parliamentary vote of no confidence, as reported by Reuters. The result crushed Bayrou’s ambitious 44 billion euro deficit reduction plan, which aimed to bring the budget deficit down to 4.6% by 2026. Opposition parties—united in their resistance to both deep spending cuts and tax hikes—brought Bayrou down, leaving President Emmanuel Macron with three unenviable options: keep Bayrou on as a caretaker, appoint a new prime minister from the political fringes, or call new legislative elections under Article 12 of the French constitution, according to Investing.com.
None of these paths promises a swift or stable resolution. As Macquarie strategists noted, “none of these may resolve concerns about rising sovereign credit risk.” The financial markets seem to agree. France’s credit rating, already downgraded last year by Moody’s after the previous government’s collapse, is again under scrutiny. The spread between French and German 10-year bond yields has widened over the past year, and France now pays higher borrowing costs than Greece or Spain—countries once considered the euro zone’s financial problem children, according to Reuters.
The immediate casualty of Bayrou’s ouster is his deficit-cutting plan. Finance Minister Eric Lombard acknowledged that the next government, which must draft a new 2026 budget by October 7, will likely be less ambitious. The Socialists, widely tipped as a source for Bayrou’s successor, are pushing for a 15 billion euro tax hike on the ultra-wealthy rather than deep spending cuts. But financial markets are skeptical. As Russel Matthews of RBC BlueBay Asset Management told Reuters, “What we’re increasingly seeing is a reluctance of market participants to buy the taxation route as a viable way to reduce big fiscal deficits. It’s just becoming less credible.”
With France’s public finances adrift, households and businesses are growing more cautious. Fabrice Cambolive, Chief Growth Officer at Renault, summed up the mood: “The more visibility you have, the more you are able to invest and spend money for the future.” The country’s debt burden, which reached 3.3 trillion euros or 114% of GDP in June, is now among the heaviest in Europe. Unlike Greece and Italy—whose debt levels are even higher—France does not run a primary surplus, making its fiscal position especially precarious. The Cour des Comptes audit office warned earlier this year that French debt payments could exceed 100 billion euros by 2029, up from 59 billion in 2024, potentially becoming the single biggest expense in the budget if growth falters or deficit reduction stalls.
The political vacuum is also fueling social unrest. Large-scale protests and general strikes are already being organized, with entrenched opposition to further budget cuts. As Investing.com noted, this “political tug of war” is expected to drive significant disruption in the coming weeks, adding downward pressure to the euro and French assets. The uncertainty has even led some strategists to recommend bearish bets against the euro, particularly against the Canadian dollar, given Canada’s relative economic stability and ongoing efforts to renegotiate trade agreements and support key industries.
Meanwhile, Japan is grappling with its own political shakeup. Prime Minister Shigeru Ishiba resigned over the weekend following a punishing defeat in Upper House elections. The immediate market reaction was telling: the yen fell by 0.8% against the dollar, while the Nikkei 225 index jumped 1.5%, drawing closer to its all-time highs. Investors are betting that Ishiba’s successor—likely to be less fiscally conservative—will pursue more accommodative fiscal and monetary policies. Revised data showed the Japanese economy grew faster than initially estimated in the second quarter, buoyed by strong exports and private spending, according to Financial Times.
Elsewhere in Asia, China’s trade balance grew slightly more than expected in August, but exports slowed sharply, signaling weakening foreign demand. Alibaba’s shares surged over 4% after unveiling a new artificial intelligence model, while Baidu rose up to 4% on news of a planned bond issuance. The Shanghai-Shenzhen CSI 300 Index and Hong Kong’s Hang Seng also posted modest gains, though growth concerns lingered as Chinese imports underperformed expectations.
Across the Atlantic, attention is focused on the upcoming Federal Reserve meeting on September 16-17. A disappointing U.S. employment report last Friday has fueled expectations of an interest rate cut, with debate swirling over whether the Fed will opt for a 25 or 50 basis point reduction. Wall Street indices closed mixed on Friday, but futures pointed to slight gains on Monday. The next U.S. inflation report, due Thursday, will be crucial in shaping the Fed’s decision.
Adding to the global uncertainty, oil prices climbed more than 1% after a heavy Russian airstrike in Ukraine overnight, which set fire to a government building in Kiev and killed at least four people, according to Ukrainian officials cited by Reuters. This rise in prices came despite OPEC+ agreeing to a modest production increase of 137,000 barrels per day starting in October. The move was seen as a surprise, given the risk of oversupply during the Northern Hemisphere’s winter months, but the market’s attention quickly shifted back to geopolitical risks following Russia’s attack.
European stock markets, for their part, opened higher on September 8, with futures up for the Eurostoxx 50, FTSE 100, DAX, CAC 40, and FTSE MIB. At the Milan Stock Exchange, Banca Mediolanum announced plans to expand in Spain, while BPM’s voluntary offer for Mediobanca ended with 45.8% acceptance. In the auto sector, Stellantis recalled nearly 92,000 Jeep Grand Cherokee vehicles in the U.S. due to a software error, and the squeeze-out process for Illimity Bank shares began, set to conclude on September 12.
As the dust settles, France’s predicament stands out. With borrowing costs now higher than those of Greece and Spain and political paralysis deepening, the country faces a daunting challenge. Economist Leo Barincou of Oxford Economics remarked, “The situation is improving everywhere except in France, which has become somewhat of an ugly duckling.” Unless a political breakthrough emerges, France risks becoming Europe’s new fiscal headache—an outcome few in Paris or Brussels would have predicted just a year ago.