Protests that began in
France a few weeks ago over poor school conditions have escalated into clashes
with police, looting, and arson amid rising fuel prices and the cost of
living.
The problem is that
France’s budget deficit reached 5.1% of GDP in 2025, while public debt
approached 120%, leaving the government with little room to support
households.
Actually, it is now
pushing for €54 billion in spending cuts in its 2027 budget, as the fiscal
outlook could otherwise deteriorate further, but getting them through amid
social unrest won’t be easy.
Demonstrations also
took place in Liège, Belgium, in early October before spreading to other cities
across Wallonia and Brussels, as well as Ireland, Spain, Italy, Germany,
Greece, and Austria.
While largely
peaceful, the unrest is putting pressure on European bond markets and the EUR/USD currency pair.
In France, for
example, long-term government bond yields have reached 5.5%, surpassing US
yields for the first time since 2013. The cost of insuring against a French
default has also climbed to its highest level since 2013.
European equities are
also under pressure, with rising energy prices amid the war in the Middle East,
Ukrainian strikes on Russian refineries, and concerns
over returns on AI investments adding to the strain and further weighing on
sentiment.
What could calm the
markets?
A strong earnings
season.
And the good news is
that consensus estimates point to 20.7% earnings growth for the STOXX Europe
600, driven by energy, technology, and industrials. Higher gas and oil prices are boosting
energy profits, while the AI investment boom is driving demand for European
equipment and industrial solutions.
According to Reuters,
tech earnings could rise by nearly 33%, while industrial profits could grow by
11%. Banks could provide an additional boost.
Of course, much will
depend on companies’ outlooks for Q4 and 2027, how well they protect margins,
and whether they can turn revenue growth into cash flow.
It is also worth
considering that earnings estimates have also been revised up for Q3, so
beating expectations may be harder.
But even if they do,
the relief may be short-lived, as Europe’s underlying fiscal problems remain
unresolved. Inflation risks are also still there, meaning central banks may
have to stay hawkish, which is hardly good news for the economy or financial
markets.
This article was written by IL Contributors at investinglive.com.