As the European Central Bank's (ECB) September policy meeting draws near, policymakers are sending unmistakable signals of further tightening to the markets.
On Wednesday, ECB Governing Council member and Bundesbank President Joachim Nagel hinted in an interview that while the future policy path remains highly uncertain, a rise in borrowing costs next week is now a near-certainty. Nagel pointed out that market pricing for a September hike has already exceeded 95%, reflecting investors' accurate grasp of the central bank's current decision-making logic. He emphasized that the eurozone's inflation rate unexpectedly jumped to 3.3% in August, far exceeding the 2% medium-term target. According to the June economic projections, only through a higher interest rate environment can inflation stabilize on a trajectory back toward the target.
Although the September move is almost a done deal, the hawkish leader displayed rare caution regarding the subsequent policy direction. Nagel conceded that, given frequent fluctuations in energy prices, severe turbulence in financial markets, and geopolitical uncertainties stemming from the conflict in Iran, the governing council prefers to adopt a flexible "meeting-by-meeting" approach. He stated: "It is very difficult for me to give any concrete guidance beyond the September meeting. This state of uncertainty is indeed unsettling from a monetary policy perspective."
Nagel's concerns are by no means unfounded. Under the strain of the tightening cycle, fiscal vulnerabilities within the eurozone are rapidly being exposed, with the turmoil in France's bond market drawing particular attention. Long regarded as the bloc's core stabilizing force, France is now facing growing market worries over its fiscal health, leading to what some describe as its "Italianization." Data shows that yields on 30-year French government bonds (OATs) and Italian bonds (BTPs) briefly converged in August, sending a dangerous signal: investors are beginning to reassess France's political and financial risks in the same way they evaluate high-risk Italian debt.
The current market data is even more striking. The yield spread between 10-year French and German government bonds has surged to approximately 0.87 percentage points, the widest since the European debt crisis of 2012. France has long hovered near the EU's debt limit, with its debt-to-GDP ratio having exceeded the threshold continuously since 2003. Although the ECB possesses tools such as the Outright Monetary Transactions (OMT) and the Transmission Protection Instrument (TPI) as backstops, whether these mechanisms can successfully rescue a core member state like France without triggering political controversy amid the current macroeconomic environment under the Trump administration and the intertwining effects of the Middle East conflict remains a major question mark.
Particularly unsettling for the market is the structure of France's creditor base. ABN Amro analyst Larissa de Barros Fritz has warned that more than 60% of France's debt is held by overseas investors, a share far higher than Italy's. These "price-sensitive" investors are extremely vulnerable, and any slight dip in demand could trigger a cascading rise in yields. As the ECB continues to hike rates and global liquidity tightens, whether this "deferred reckoning" will ultimately materialize has become the key悬念 shaping the eurozone's economic outlook.