Reuters on Monday reported that French financial markets were thrown into turmoil after newly appointed Prime Minister Sébastien Lecornu resigned just 12 hours after announcing his cabinet, plunging the country deeper into political and economic uncertainty and rattling investors across Europe.

Lecornu's abrupt resignation, the shortest-lived government in modern French history, left President Emmanuel Macron without a functioning cabinet and further exposed the paralysis gripping France's political system. Since Macron's re-election in 2022, his centrist alliance has struggled to secure a parliamentary majority, stalling key budget votes and reform efforts. Analysts say the latest collapse underscores a governability crisis that has now spilled into the financial sphere.

Markets Lose Faith

The  CAC 40 index dropped 2.06%, erasing billions in market value and making it Europe's worst performer on the day. Major French lenders, including BNP Paribas, Société Générale, and Crédit Agricole, fell between 4% and 5%, while the euro slid 0.7% to $1.1665, reflecting investor unease. "It's concerning that the new cabinet only lasted 12 hours," said Kirstine Kundby-Nielsen of Danske Bank. "There seems to be no willingness in parliament for a budget to be passed, so I think yields higher, pressure on euro-dollar in the near term."

The sell-off extended beyond France: mid-cap stocks plunged 2.6%, their sharpest one-day drop since April, while the STOXX 600 lost 0.3% and Germany's DAX also dipped. Analysts warned that the crisis risks spilling over into other eurozone economies, particularly as France's debt burden, now exceeding 114% of GDP, remains one of the highest in Europe.

Adding to the strain, Fitch Ratings downgraded France's credit rating last month from AA− to A+, citing persistent deficits and policy gridlock. The budget shortfall, hovering near 6% of GDP, is nearly double the EU's 3% limit, raising questions about France's adherence to fiscal rules as the bloc tightens oversight.

"It certainly makes people wary about European assets at this point because of the uncertainty and the spillover effects that go from France just being unable to find its way out of this malaise," said Chris Beauchamp, chief market analyst at IG Group.

Bond markets reflected those fears. The yield on France's 10-year bonds climbed nearly 9 basis points to 3.59%, while the spread over German Bunds widened to 86.5 basis points, its highest level since January, nearing levels seen during the eurozone's 2012 debt scare. Meanwhile, credit default swaps (CDS), instruments used to insure against sovereign default, rose to 41 basis points, signaling mounting doubts about France's creditworthiness.

Political Paralysis

Economists warn that without a stable government, Macron may be forced to consider dissolving parliament or calling new elections, both of which could heighten political risk. The stalemate also imperils France's efforts to meet EU deficit targets and could hinder the bloc's wider fiscal reforms.

"The bigger question is how does this all resolve itself?" said Michael Brown, senior research strategist at Pepperstone. "Because there doesn't seem to be an obvious solution or obvious silver bullet that we can look to to resolve it overnight."

The crisis has fueled broader fears that France, traditionally seen as a pillar of the eurozone, may be drifting toward the economic periphery as uncertainty erodes its credibility. With three prime ministers in under a year, growing public discontent, and mounting debt, investors warn that France's instability could weigh on the euro's outlook and unsettle the EU's fragile recovery.

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