French debt fears sink the euro, the US eases off Canada, and Europe's car industry braces for a Chinese surge

France's bond market is doing something specific right now: it is charging the French government more to borrow than it charges Germany. That gap, the sovereign risk premium, is the market's way of saying it sees more risk in French debt. The mechanism runs like this. Investors sell French bonds, which pushes bond prices down and yields up. A higher yield means France pays more interest on every new bond it issues, which makes the deficit harder to close, which makes investors more nervous, which pushes yields higher still. It is a feedback loop, and it is why bond markets can move fast once confidence cracks.

The protests matter here because they make a credible budget harder to pass. France's deficit is already above the EU's 3% of GDP ceiling, the rule that says a government should not borrow more than 3 euros for every 100 euros its economy produces. A government that cannot get a budget through parliament cannot cut spending or raise taxes, so the deficit stays wide, and the risk premium stays elevated. The ECB's expected rate cut on Thursday adds a twist: cutting rates normally weakens a currency anyway, so a euro already under pressure from French politics could fall further. That is the part worth watching, because a sharply weaker euro raises import prices across the whole eurozone, not just France.

The honest limit here is that one week of bond-market pressure is not proof of a full-blown debt crisis. France has been here before, most recently in 2024, and the spread eventually narrowed. What is different now is that the protests are larger and the political arithmetic for a budget deal looks harder. If the government finds a coalition to pass a credible fiscal plan, the premium should ease. If it cannot, the ECB will face a genuinely awkward Thursday: cutting rates into a currency that is already sliding.

A tariff is a tax on an imported good, paid by the importer, usually a domestic firm, not the foreign exporter. When the US put tariffs on Canadian machinery, American factories that buy Canadian equipment faced higher costs. Those costs either squeeze profit margins or get passed on as higher prices for whatever the factory makes. Removing those tariffs reverses that chain: input costs fall, which can lower the price of the final good or restore the margin that was being squeezed. The terms of trade, the ratio of export prices to import prices, shifts slightly in the US's favour when it can buy Canadian inputs more cheaply again.

What I find telling is the selectivity. Machinery tariffs come off because manufacturers, a politically visible group in swing states, have been loudest about the cost squeeze. Carpet tariffs go on, presumably because domestic carpet producers have lobbied for protection. This is textbook rent-seeking, where firms spend resources trying to influence policy in their favour rather than improving their product. The result is a patchwork that reflects political pressure more than any coherent trade strategy. One month of data before an election is not proof that US-Canada trade relations are normalising. The structural question, whether the two countries can rebuild the integrated supply chains that existed before 2025 - remains unanswered.

China's EV cost advantage is largely a subsidy story. A subsidy is money a government gives to a producer, either directly or through cheap loans, cheap land or state-backed energy, to lower its costs. When Chinese EV makers receive large subsidies, their production costs fall below what the market would otherwise allow. They can then sell cars at prices that European firms, without equivalent support, cannot match. The EU's tariff on Chinese EVs is meant to cancel out that subsidy by adding a tax at the border, restoring a level playing field in theory. Whether it works depends on how large the underlying subsidy actually is, which is genuinely hard to measure.

The precedent worth thinking about is the solar panel dispute of the early 2010s, when the EU imposed tariffs on Chinese solar panels after finding evidence of subsidised dumping, selling below cost to capture market share. The tariffs slowed Chinese panel imports into Europe, but they also raised the cost of solar installation across the continent, slowing the energy transition. The EV case has the same tension. Protecting European carmakers keeps jobs in Germany, France and elsewhere, but it also keeps EV prices higher for European consumers and could slow the shift away from petrol cars. The question the ministers in Brussels cannot easily answer is which cost is larger.