“France must make difficult decisions to control its deficit”

The French Assembly voted on Michel Barnier's vote of no confidence motion this Wednesday. It’s the first time since 1962 that a French government has fallen in a censure motion, and it takes place against a backdrop of growing concern about deficit levels that have pushed the risk premium to levels not seen since the euro crisis.

Alberto Matellán, chief economist at MAPFRE Inversión, explains that the fall of the government prevents significant decisions from being made to halt the rise. “It's an important point because the deficit dynamics are causing French bonds to trade with quite a lot of risk attached to them. This doesn’t pose an immediate risk, but difficult decisions need to be taken to control the situation,” he says, adding that if the government were to fall, he hopes that the new team will have a sense of responsibility toward the State.

Matellán also adds that when governments have fallen in other countries and at other times, such as in Belgium or Italy, the economy did not face the problems currently weighing down France, where the government plays a significant role in the economy. In addition, the fall of the executive means that all issues related to public investment are going to be put on hold.

For his part, president Yoon Suk Yeol of South Korea declared martial law on Tuesday, the first time since 1980 the measure has been deployed, accusing the opposition of “controlling Parliament, exercising anti-state activities and sympathizing with North Korea.” Amid strong opposition, the imposition of martial law was reversed a few hours later, and a motion of censure against the president was filed.

The chief economist at MAPFRE Inversión believes that the decision won’t have major consequences on the country's stock exchange. "Stock market consequences aren’t immediate to a political crisis. We’ll see the main impact on geopolitics, but I don't think it will go any further. South Korea is a democratic country and this can be resolved without having a very serious impact on the economy,” he said.

As far as monetary policy is concerned, the European Central Bank (ECB) meets next week and all indicators point to another cut in interest rates. "The drop is probably going to be 25 basis points – there’s no justification for it to be more aggressive. What continues to exist are growth problems due to structural problems and that can’t be fixed through rates,” he explains.

In fact, the European economy delivered some surprisingly negatively news this week, with a worse-than-expected PMI. However, Matellán adds that these type of data correspond to surveys and simply reflects perceptions, so “it has no direct on or linear relationship with the macro scenario”.

On the other side of the pond, the situation is different: everything points to the U.S. economy showing continued strength, and for Matellán, it’s logical that there will be a pause in the Federal Reserve’s lowering of rates. “The market expects the Fed to lower rates to 3.5%, but it can do so more slowly: the growth data are stronger than expected and the projected inflation data aren’t very high, although they are above 2%. From the macro point of view, the right thing to do now is to take a time-out.