Barclays prefers Germany over France as it sends 'bond vigilante' warning

German blue-chip stocks show more promise than their French counterparts, Barclays' strategists wrote in a note Friday, saying France has weak "long-term fiscal and growth fundamentals" and a looming risk of bond vigilantes sweeping in.

The euro zone's two biggest economies are both struggling. Germany is battling an ongoing manufacturing downturn that has turned it into the bloc's growth laggard, while disputes over its budget and long-term fiscal strategy caused its government to collapse earlier this month.

However, French borrowing costs have climbed above Germany's this year as political instability in the country spooked markets.

France is staring down years of potential political uncertainty, given its fiercely divided parliament in which no party or faction has a majority. There are also investor concerns over whether it can reduce its hefty debt pile and avoid credit rating downgrades.

A key question is whether French Prime Minister Michel Barnier's fragile government can pass the budget proposed in October — which includes significant public spending cuts and 60 billion euros ($65.6 billion) in tax hikes — or whether it will be toppled in a no-confidence vote beforehand.

"Compromise on the French budget remains possible. But any relief may be short-lived. There is no easy solution to the political impasse, while long-term fiscal and growth fundamentals remain poor," Barclays strategists said Friday, adding they maintain their preference for Frankfurt's DAX stock index over Paris's CAC 40.

France's left-wing New Popular Front alliance has said it will table a vote of no confidence if Barnier tries to force through the budget — so the government may need to make concessions to the far-right National Rally party in