September 22, 2025 France’s fading glamour

Last Thursday, the Fed lowered its key interest rate by 0.25 percentage points to 4.25%. This was the fourth cut since September 2024, when the rate was still 5.5%. Although the cut was widely expected, it was still closely watched, given that President Trump has been putting strong pressure on Jerome Powell (including attempting to dismiss Fed member Lisa Cook) to cut interest rates quickly and significantly. With its first cut this year and the indication that more will follow, the Fed has found a balance between taking necessary action—partly due to weak labor market data—and avoiding the perception that it has lost its independence, which would have caused turmoil in the treasury market. The stock market reacted positively, especially the interest-sensitive tech segment, in which we hold a significant position.

While the U.S. is always in the spotlight of the media and financial markets, a development that should not be overlooked in a global context is the worsening situation in the EU, especially in the Eurozone. On September 12, Fitch Ratings downgraded France’s long-term foreign-currency issuer default rating to “A+” from “AA-“ due to its high and rising debt level and political chaos, which makes long-overdue reorientation very difficult. We have frequently commented on increasing debt levels in many countries, as well as Moody’s downgrading of the U.S. to Aa1 from Aaa in May.

France’s level of indebtedness (115%) is currently slightly lower than that of the U.S. (119%). However, people should clearly differentiate between the two downgraded countries’ situations. While the situation in France is dismal, it is much better in the world’s largest and strongest economy. In the former “grande nation,” President Macron and his frequently changing government seem to have lost control. Urgently needed austerity measures are obviously not possible. One example is the failed attempt to eliminate two public holidays. As always, the population is responding to a reduction in benefits and government support with protests and strikes. The budget balancing measure approved by 86% of respondents in a recent poll is the so-called “Taxe Zucman.” This new tax would impose an annual levy of 2% on assets worth more than EUR 100 million. The mentality in France of taxing the rich in the hope that they will stay and enjoy a full range of subsidies, and one of the lowest weekly work hours worldwide, is not exactly a formula for success. However, in the U.S., the government has a firm grip on the situation—maybe even a bit more than it is appropriate. Taxes will be lowered, and government spending will be cut. This will further strengthen the country’s economic power, which is already bolstered by its leading role in technology and AI.

Another difference between the two downgrades lies in their implications. While the U.S. is a stand-alone economy, France is second in the eurozone after Germany, which has its own problems. For the first time in history, bond markets are demanding the same interest rate for French government bonds as for Italian ones. France is now the Eurozone’s fiscal time bomb. This does not mean that there are no longer any investment opportunities in Europe. But it certainly means: Beware of the euro!