The European Central Bank (ECB) is set to convene on Thursday, with France’s deepening political crisis likely to dominate discussions. The country’s turmoil has introduced a new challenge for policymakers, as France is the eurozone’s second-largest economy.
The ECB is expected to maintain its key interest rate at 2% for the second consecutive meeting, given that inflation is under control and trade tensions have eased following the EU-US deal agreed upon in July. However, the recent French political crisis has thrown a curveball at the central bank, affecting the 20 countries that use the euro.
French Prime Minister Francois Bayrou resigned on Monday after losing a confidence vote over an austerity budget, and was swiftly replaced by Sebastien Lecornu, the country’s third prime minister within a year. This development has resulted in France’s borrowing costs surging above those of Italy, a traditional eurozone debt laggard.
ECB President Christine Lagarde will likely face questions about the situation in France, although she may emphasize the importance of fiscal responsibility without commenting on the politics of individual eurozone member states. Analysts believe that the ECB may consider using the Transmission Protection Instrument (TPI), a mechanism aimed at calming disorderly movements in bond markets, but its deployment is unlikely at this stage.
The TPI, established in 2022 during a period of instability in Italy, involves the ECB buying bonds of a eurozone country struggling to raise finances due to unjustified market attacks. However, analysts see little chance of the tool being used unless the French crisis spreads to other countries, pushing up their borrowing costs.
France’s debt has reached 3.3 trillion euros, or 114% of its gross domestic product, and the new prime minister, Sebastien Lecornu, faces the daunting task of building a government with sufficient parliamentary support to avoid an early demise and devising a budget for 2026.
The ECB’s concerns are further compounded by an increasingly bleak outlook in Germany, the eurozone’s top economy, where recent data have dashed hopes for a strong rebound. Despite these concerns, the ECB is expected to keep interest rates on hold, as inflation has stabilized at around the central bank’s 2% target.
The ECB will release new forecasts on Thursday, with analysts expecting slight downgrades for growth and inflation predictions for 2026. The tariff uncertainty that had kept the ECB on its toes for months has subsided after the EU-US deal, which sets levies on most goods from the bloc at 15%. The ECB’s decision on Thursday will be closely watched, as it navigates the challenges posed by France’s political crisis and the eurozone’s economic outlook.
