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Investors have started demanding higher compensation to lend money to France compared to Spain, signaling a shift in confidence towards Spain’s strong economy while punishing France for its struggling finances. This comes after France’s unexpected June-July elections further dampened recovery prospects.

Spain, once considered one of the weakest economies in the euro zone, is now perceived as a safer investment than France, the second largest economy in the bloc. Here are four reasons why Spain is outperforming France:

1. Bond Yields: France’s 10-year government bond yield exceeded Spain’s for the first time since 2008 recently, highlighting a significant reversal from the 500 basis point difference seen during the 2012 euro zone debt crisis. Investors are now favoring Spain over France, with some even considering Spain to potentially move towards “semi-core” status.

2. Fiscal Discipline: France faces budget deficit risks exceeding the EU’s 3% limit, while Spain is on track to reach a 3% deficit this year without facing disciplinary measures. Spain’s government has been more successful in managing its debt, with a faster reduction post-pandemic compared to France.

3. Economic Growth: Spain’s economy is growing at a faster pace than France’s, driven by strong tourism and a robust labor market supported by immigration. The EU’s COVID recovery fund has also allocated significantly more funds to Spain, contributing to expectations of high growth rates in the coming years.

4. Credit Ratings: Despite its lower debt levels and stronger growth outlook, Spain still holds lower credit ratings than France. However, Spain has seen multiple upgrades by credit ratings agencies in recent years, while France has experienced downgrades.

Overall, the market is signaling a shift in favor of Spain over France, with bond yields and credit ratings potentially aligning to reflect Spain’s improved economic performance.

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