At the Weseler Werft, a green strip along the river Main in Frankfurt with a view of the European Central Bank (ECB) headquarters, the music of Strauss, Mendelssohn, and Liszt rang out on August 21. The ECB sponsored the Europa Open Air concert to celebrate European diversity.
“Music connects us all,” said Christine Lagarde, the bank’s president. Visitors could not only listen to the works of great composers but also learn about the bank and take part in a quiz on Europe. The prize for the happy few? A guided tour of the ECB offices. Well…
Had I been there, I would have asked the quizmasters a question myself: “what is the spread between Italian and French 10-year bond yields, and how does that spread compare historically?”
In the past, the spread was so large it was visible from a distance: typically about 100 basis points and, in tense times such as the euro crisis of 2012, even 400 basis points. In 2025, we need to stand very close to the chart to spot the difference—if not use a magnifying glass. This week the gap fell below 10 basis points.
The fact that Italian yields hardly differ from French ones means that investors now see France as being just as risky as Italy. In Rome, that is surely cause for celebration.
The reason is straightforward. Today, Italy enjoys a period of political stability previously unheard of for the country—within weeks, the Italian government will have lasted 3 years, quite an achievement in a nation where, since the end of World War II, governments have on average fallen after just 12 months. France, meanwhile, is heading toward yet another government collapse and new parliamentary elections. While Italy appears on track to reduce its budget deficit from over 4 percent in 2024 to below 3 percent this year, Paris is running a deficit of almost 6 percent of GDP and hopes only to drop below 3 percent by the end of this decade—or perhaps the next.
One could describe this shift as France quietly becoming the weakest link in the eurozone, while Italy no longer holds that title. Especially since another, far more familiar spread—the one between Italian and German 10-year yields—has also fallen sharply, from nearly 600 basis points at its peak to now below 100 basis points.
That yield difference has long been seen as the fear barometer for the euro’s survival. But beware of concluding that its decline means the currency union is more resilient. The narrowing of the Italian-German spread is mostly due to German yields rising faster than Italian ones. That could signal that Germany itself is slowly becoming riskier. Not an unreasonable conclusion, given that the German economy has been stagnating for some time, government debt is set to increase, and the pension bill (for which Berlin has set aside almost nothing) is growing by the month.
Since the euro’s creation, it has been common to speak of the weakest link in the chain that is the monetary union. Twenty-five years later, there are multiple weak links—France being the weakest of them all.
You won’t hear Lagarde mention that, though. On August 23, she spoke at Jackson Hole, the Fed’s annual conference, about how labor market transitions—such as the impact of aging populations—affect policy. She opened with a quote from French philosopher Alexis de Tocqueville: “History is a gallery of pictures in which there are few originals and many copies.” Labor market shifts are indeed crucial. But in the gallery of monetary pictures, the euro risks becoming anything but an original—rather a copy of the Italian lira or the French franc.
And as that process unfolds, the orchestra cheerfully played at Weseler Werft in Frankfurt. Does that not remind you of the orchestra on the Titanic, said to have kept playing as the ship sank in 1912 and ever since a symbol of ignoring impending disaster?
Edin Mujagić is an economist, manager of the Hoofbosch Investment Fund, and author of the book Turning point 1971. He writes a monthly ECB Watch for Investment Officer on the monetary policy of the European Central Bank.