Could France’s economic turmoil spark eurozone debt crisis?
How did your country report this? Share your view in the comments.
Diverging Reports Breakdown
Could France’s economic turmoil spark eurozone debt crisis? – DW – 09
France’s debt-to-GDP ratio is so high that only Greece and Italy surpass it within the European Union. With a budget deficit of 5.4% to 5.8% this year, Paris also runs the largest budget shortfall in the 27-nation EU. While German bonds carry an interest rate of about 2.7%, the French government needs to pay close to 3.5% interest for its debt. Other major economies are also racking up historically high debt and must raise billions on capital markets to finance their spending. The only reason the markets aren’t even more nervous — meaning the spreads on French bonds aren’t rising further — is hope that the European Central Bank will buy French bonds to stabilize the market, says Friedrich Heinemann, an economist with the ZEW Leibniz Center for European Economic Research in Mannheim, Germany. The EU Commission has “helped create this mess,” he says, adding that “France has already used up much of its fiscal space” The risks to European markets remain manageable for now, says London-based chief economist at Capital Economics.
Few doubt that Prime Minister Francois Bayrou will lose the confidence vote in the French parliament scheduled for Monday (September 8), as the current French government lacks the majority needed to push through his budget-cutting plans aimed at reining in France’s public debt.
What happens next is uncertain. Whether new elections will be called, as demanded by the far-right Rassemblement National, or President Emmanuel Macron manages to install another minority government, is the political side of the crisis.
The French far-right led by Marine Le Pen and Jordan Bardella stand to benefit most from a government collapse Image: Aurelien Morissard/Maxppp/dpa/picture alliance
Economically, it’s about money and France’s towering debt burden. In absolute terms, no EU country holds more consolidated national debt than France. Sovereign debt has climbed to around €3.35 trillion ($3.9 trillion) — about 113% of gross domestic product (GDP), with the figure expected to rise further to 125% by 2030.
Europe’s debt king
France’s debt-to-GDP ratio is so high that only Greece and Italy surpass it within the European Union. With a budget deficit of 5.4% to 5.8% this year, Paris also runs the largest budget shortfall in the 27-nation EU.
To meet the EU’s target of reducing the deficit to 3%, drastic savings are unavoidable.
However, since cuts are currently politically untenable, financial markets have responded with higher risk premiums on French bonds. While German bonds carry an interest rate of about 2.7%, the French government needs to pay close to 3.5% interest for its debt.
So should we worry about the stability of the single European currency, the euro, if the finances of the eurozone’s second-largest economy slip out of control?
“Yes, we should be worried. The eurozone is not stable at this point,” says Friedrich Heinemann, an economist with the ZEW Leibniz Center for European Economic Research in Mannheim, Germany, even though he is “not concerned” about a new short-term debt crisis in the coming months.
“But we have to ask where this is heading if a big country like France, which has seen a steadily rising debt ratio in recent years, now also faces further political destabilization,” he told DW.
Other major economies are also racking up historically high debt and must raise billions on capital markets. This fall, for example, Germany, Japan, and the US will need to issue new government bonds to finance their spending — a key reason global bond markets remain under pressure.
The only reason the markets aren’t even more nervous — meaning the spreads on French bonds aren’t rising further — is hope that the European Central Bank will step in and buy French bonds to stabilize the market, Heinemann thinks. “But that hope could be misplaced, because the ECB has to be careful not to undermine its credibility.”
It’s been a long-standing political dilemma for successive French governments that whenever they propose austerity measures or economic reforms, parties on both the left and right cry foul and mobilize their supporters.
Unions have already called a general strike for September 10, two days after the confidence vote.
EU Commission and ECB under pressure
France now spends €67 billion annually just on interest payments. And it is under pressure because it has committed to gradually reducing its deficit in line with EU rules.
But Heinemann also lays part of the blame on the steps of the EU Commission because it has “helped create this mess.”
“It kept turning a blind eye, even both eyes, when it came to France. Those were political compromises driven by fear of strengthening populists,” he said, adding that “France has already used up much of its fiscal space. Germany is in a much better position, with plenty of room to maneuver.”
Stalled reforms
According to Heinemann, France, like Germany, urgently needs major welfare reforms and spending cuts. The alternative would be higher taxes in a country that already imposes heavy tax burdens on both citizens and businesses.
Therefore, Heinemann is skeptical that French politics can deliver a cross-party consensus on debt reduction. “With populists on both the left and right gaining ground, I don’t see that happening. The center is shrinking. That’s why I’m pessimistic about France and don’t see a solution.”
Reforms in France have largely stalled, including liberalizing trade with the world Image: Stephane Mahe/REUTERS
For Andrew Kenningham, chief European economist at London-based Capital Economics, the risks to other European markets remain manageable for now.
“So far, the problems seem largely confined to France itself, as long as the scale of the French issue doesn’t grow too big,” he said in a note to clients.
But he warned of scenarios where France’s crisis could escalate significantly, raising the risk of contagion.
“After all, France is the eurozone’s second-largest economy, with deep trade and financial ties to its neighbors, and it is also a leading EU political power,” Kenningham noted, saying a crisis in France could therefore put the very viability of the European project into question.
“We don’t expect a crisis of that magnitude in the next one to two years. But if it were to happen, contagion could become a much bigger risk — one the ECB would have to address,” he said.
Bad timing for a political crisis
France’s turmoil comes at a time when the EU is locked in conflict with the United States over trade policy, including higher taxes on US tech giants proposed by France.
France: Bankruptcy wave could worsen with US tariffs To view this video please enable JavaScript, and consider upgrading to a web browser that supports HTML5 video
It’s poor timing for the EU to appear weakened by the political deadlock in its second-largest economy.
For Heinemann, many political actors in France are “Trumpists at heart,” especially on the left and right of the political spectrum.
“They could increase pressure on the European Commission to retaliate against Trump’s tariffs with European tariffs,” the economist warned, which would “raise the risk of a real trade war” and worsen the country’s debt crisis even further.
This article was originally written in German.
The massive debt behind France’s political turmoil
France’s public debt has steadily risen for decades, fuelled by chronic budget deficits. The debt grew to 3.3 trillion euros ($3.9 trillion) in the first three months of this year. It amounts to 114 percent of France’s annual gross domestic product (GDP, a measure of economic output) The debt ratio is almost double the limit of 60 percent allowed by the European Union. But economists from Attac, a French activist group campaigning for financial justice, and the Copernic Foundation argue that France’s debt isn’t as alarming as the government suggests. Some, including the French government itself, have raised the spectre of a scenario reminiscent of the Greek debt crisis that rocked the eurozone more than a decade ago. The yield on 10-year sovereign bonds exceeded 3.6 percent this week, the highest since March and approaching the same level as Italy. France’s long-term borrowing cost jumped to its highest level since 2011 on Tuesday as the yield on 30-year government bonds topped 4.5 percent.
Source: AFP
France’s growing debt pile is at the heart of the confidence vote that could topple the government of Prime Minister Francois Bayrou next week.
Bayrou called the vote to settle a fight over the budget as he seeks 44 billion euros ($51 billion) in savings to cut the debt.
But his plan, which includes reducing the number of holidays, has proved unpopular.
Here is a look at the country’s fiscal situation ahead of Monday’s vote in parliament:
How big is it?
France’s public debt has steadily risen for decades, fuelled by chronic budget deficits financed through borrowing on bond markets.
The debt grew to 3.3 trillion euros ($3.9 trillion) in the first three months of this year, or over 48,000 euros per French national.
The debt amounts to 114 percent of France’s annual gross domestic product (GDP, a measure of economic output) — the third highest debt ratio in the eurozone after Greece and Italy.
The debt ratio is almost double the limit of 60 percent allowed by the European Union.
By comparison, the debt-to-GDP ratio was at 57.8 percent in 1995, but financial crises, the Covid pandemic and high inflation have fuelled its rise.
It’s not great, but it could be worse.
The Avant-Garde Institute, a think tank, noted that France’s debt ratio was as high as 300 percent of GDP between World War I and World War II.
Eric Heyer, an economist at the French Economic Observatory think tank, told AFP that “many countries are above” France’s 114 percent debt-to-GDP ratio.
What’s the problem?
More debt means more of the country’s taxpayer money goes into paying interest to creditors.
The growth of state spending on servicing the debt has been one the threats cited by the government.
The government’s debt burden, or interest payments, totals 53 billion euros in 2025, according to the medium-term budget plan presented in April.
Bayrou has warned that the number will grow to 66 billion euros in 2026, making it the government’s main spending item ahead of education.
“The consequence for French people is that we can’t do other things,” Pierre Moscovici, president of the national audit body, told news channel LCI on Sunday.
But economists from Attac, a French activist group campaigning for financial justice, and the Copernic Foundation, a left-leaning organisation, recently argued in Le Monde that France’s debt isn’t as alarming as the government suggests.
The government spent just two percent of the country’s GDP on interest payments last year, the groups said in a joint column in Le Monde newspaper.
Other experts, including Heyer, also question the government’s presentation of interest costs, saying it does not take inflation into account.
When prices rise, inflation can reduce the real burden of debt because the government collects more in taxes and the economy grows, giving it more room to manoeuvre financially.
Is there a risk of crisis?
Some, including the French government itself, have raised the spectre of a scenario reminiscent of the Greek debt crisis that rocked the eurozone more than a decade ago.
France’s long-term borrowing cost jumped to its highest level since 2011 on Tuesday as the yield on 30-year government bonds topped 4.5 percent.
The yield on 10-year sovereign bonds exceeded 3.6 percent this week, the highest since March and approaching the same level as Italy, long seen as a budget laggard in Europe.
The rates, however, do not suggest that another Greek-like crisis is in the offing, said Ipek Ozkardeskaya, analyst at Swissquote Bank.
“The contagion risk remains limited. But France must find a way to tidy up its finances before gaining investors confidence back,” Ozkardeskaya said.
There is still strong demand for French debt: On Thursday, the state raised 7.3 billion euros in a sale of 10-year bonds.
The European Central Bank also provides a safety net by intervening in bond markets to buy government debt, said Christopher Dembik, a strategist at Pictet investment firm.
He predicted, however, that ratings agencies will downgrade France’s debt.
Source: AFP
The Vulnerability of France’s Debt Amid Political Paralysis
France’s public debt crisis is no longer a distant specter—it is a present reality. With public debt projected to reach 115.5% of GDP in 2025, the country’s fiscal trajectory has become a focal point for global investors and policymakers. The widening yield spread between French bonds and German Bunds reflects a growing risk premium, signaling that markets are pricing in heightened default risks. Investors must monitor political developments closely, as a failure to stabilize fiscal discipline could invite a wave of bond vigilante activity. For now, markets remain cautiously optimistic, but the window for reform is narrowing. A credit rating downgrade, already feared by analysts, could accelerate this process. The key question is whether France can avoid a Greek-style crisis, and whether it can restore fiscal discipline and restore investor confidence in the country. The risk of bond vigilantes, once a relic of the 1980s debt crises, have reemerged as a potent force. The bond market storm remains, but for now, the crisis is averted.
Political Paralysis and Fiscal Stagnation
France’s political landscape has become a battleground for fiscal reform. The government’s inability to pass a credible budget has stalled efforts to reduce its 5.4% deficit, a figure that remains stubbornly high despite a late-2024 economic forecast projecting a narrowing to 5% by 2026 [1]. This delay has eroded investor confidence, with the yield on French 10-year bonds surging to 3.6% in September 2025, surpassing Greece’s 3.36% and approaching Italy’s levels [3]. The widening yield spread between French bonds and German Bunds—reaching 79.6 basis points—reflects a growing risk premium, signaling that markets are pricing in heightened default risks [1].
The political turmoil is not merely symbolic. According to a report by The Economist, the government’s fiscal adjustment measures have been “watered down by political infighting,” leaving France’s debt-to-GDP ratio on track to exceed 120% by 2027 [3]. This trajectory is compounded by a 5.7% deficit forecast for 2026, driven by expiring revenue measures and rising interest costs [1]. With the European Central Bank’s support waning and credit rating agencies on alert, France’s fiscal credibility hangs in the balance.
Bond Market Reactions and Vigilante Risks
Bond vigilantes, once a relic of the 1980s debt crises, have reemerged as a potent force. Investors are increasingly scrutinizing France’s fiscal policies, with a recent ECB blog post warning that “market discipline is returning to sovereign debt markets” [2]. The 3.6% yield on French bonds in September 2025 marked a critical threshold, reflecting a shift from complacency to caution. While yields later retreated to 3.1%, this volatility underscores the fragility of market confidence [4].
The risk of a full-blown bond market storm remains. A report by BNP Paribas notes that France’s debt servicing costs—projected at €53 billion in 2025 and €66 billion in 2026—could spiral out of control if political paralysis persists [4]. The 30-year bond yield hitting 4.5% in September 2025, a level not seen since 2011, further illustrates the market’s wariness [4]. While France’s debt maturity profile and low historical borrowing costs offer some buffer, these advantages are eroding as political uncertainty prolongs fiscal delays.
Implications for Investors
For investors, the key question is whether France can avoid a Greek-style crisis. Unlike Greece, France benefits from a robust economy, a AAA-rated currency (the euro), and European Union support. However, these safeguards are contingent on credible fiscal reforms. As stated by the OECD, “without a clear path to consolidation, France’s debt burden will undermine long-term growth and investor trust” [3].
The risk of bond vigilante intervention is real. If political instability persists, investors may demand higher yields to compensate for increased default risks, triggering a self-fulfilling debt spiral. A credit rating downgrade, already feared by analysts, could accelerate this process. For now, markets remain cautiously optimistic, but the window for reform is narrowing.
Conclusion
France’s debt vulnerability is a cautionary tale of political dysfunction and fiscal inertia. While the country’s economic fundamentals remain resilient, the bond market’s growing skepticism signals a dangerous shift. Investors must monitor political developments closely, as a failure to stabilize the deficit and restore fiscal discipline could invite a wave of bond vigilante activity. For now, the crisis is averted—but only just.
**Source:[1] Economic forecast for France – Economy and Finance [https://economy-finance.ec.europa.be/economic-surveillance-eu-economies/france/economic-forecast-france_en][2] Who are the “bond vigilantes” on sovereign debt markets? [https://www.ecb.europa.eu/press/blog/date/2025/html/ecb.blog20250814~86d5171bf2.en.html][3] OECD Economic Outlook, Volume 2025 Issue 1: France [https://www.oecd.org/en/publications/oecd-economic-outlook-volume-2025-issue-1_83363382-en/full-report/france_f5ba9a68.html][4] The massive debt behind France’s political turmoil [https://www.nbcrightnow.com/national/the-massive-debt-behind-frances-political-turmoil/article_fa0cf198-b584-501e-a3d2-0748e25d790d.html]
France isn’t heading to the IMF, ECB’s Lagarde says
The French minority government is widely expected to be toppled in a confidence vote on Sept. 8. The opposition parties ignore Prime Minister François Bayrou’s appeal to them to support his 2026 budget plans. Lagarde, who was in charge of the IMF during the bailouts of Greece and other eurozone countries a decade ago, suggested this talk was overdone.
Bayrou’s finance minister, Eric Lombard, had warned that a collapse could spark so much turmoil that the IMF would have to intervene, though he quickly backpedalled. Lagarde, who was in charge of the IMF during the bailouts of Greece and other eurozone countries a decade ago, suggested this talk was overdone.
She argued that the IMF typically only responds to requests for help from countries that have immediate problems with their balance of payments and which cannot pay their debts.
“That isn’t the case with France today,” she said, adding that the IMF “would probably say that the conditions aren’t met” and would instead tell Paris to “get organized … and put your public finances in order.”
“It is obviously necessary the direction, as regards terms of debt service and debt volumes, be headed downward and that they come back into the limits of what has been agreed” at a European level, Lagarde stressed.
EU rules limit a country’s budget deficit to 3 percent of gross domestic product, but France’s has been well above that level since the pandemic. It is set to stay above 5 percent of GDP this year, while Bayrou is looking for a way to get parliament to approve a budget that would close the gap to 4.6 percent next year.
Eurozone Political Instability and the Risks to Sovereign Debt Markets
The September 8 confidence vote on a €44 billion austerity plan has become a litmus test for France’s ability to navigate its fiscal crisis. The far-right National Rally and the Socialist Party have vowed to oppose the vote, ensuring a high likelihood of government collapse if Bayrou loses. A government collapse would likely delay critical reforms, such as labor market modernization and energy transition investments. The financial markets have already priced in significant risk. Investors should monitor the outcome of the confidence vote and track the evolution of the French-German yield spread. A sustained widening beyond 100 basis points could signal a deeper crisis, warranting hedging strategies against Eurozone political fragmentation. The risks are multifaceted. Sovereign debt portfolios with exposure to French bonds face heightened volatility, while equities in sectors like utilities and public services could suffer from prolonged strikes and policy uncertainty. The ECB’S ability to manage inflation may also be constrained if political instability forces it to prioritize financial stability over monetary tightening. The political chaos could embolden populist forces across Europe.
The Political Quagmire
France’s political landscape is a minefield of contradictions. Bayrou’s government, formed after a July 2024 snap election that produced no clear majority, is a minority administration reliant on fragile cross-party support. The proposed budget, which includes freezing welfare and pension spending and cutting public holidays, has drawn fierce opposition from both left-wing and right-wing factions. The far-right National Rally and the Socialist Party have vowed to oppose the vote, ensuring a high likelihood of government collapse if Bayrou loses [1]. Such a scenario would force President Macron to either appoint a new prime minister or dissolve the National Assembly, triggering snap elections and further delaying fiscal reforms [2].
The stakes are dire. France’s public debt now stands at 114% of GDP, with a budget deficit of 5.8%—well above the EU’s 3% target [3]. Without a functioning government, structural reforms to reduce debt will stall, pushing the deficit higher and eroding investor confidence. The “Bloquons Tout” (Let’s Block Everything) movement, echoing the Yellow Vests protests, has added another layer of volatility, with planned strikes in key sectors threatening to paralyze the economy [4].
Economic Repercussions and Market Signals
The financial markets have already priced in significant risk. France’s 10-year government bond yield surged to 3.53% in early August 2025—the highest since March 2025—reflecting investor anxiety over political uncertainty [5]. The French-German 10-year yield spread widened to 78 basis points by late August, a stark divergence not seen since 2012 [6]. This widening signals growing fragmentation within the Eurozone, as France’s fiscal challenges contrast with Germany’s relative stability.
European Central Bank President Christine Lagarde has explicitly warned that any government collapse in the eurozone is a “concern,” noting that France has developed a “risk premium” in financial markets [7]. This premium is not merely theoretical: it translates into higher borrowing costs for the French government, which could exacerbate its debt burden and trigger a vicious cycle of rising deficits.
Broader Eurozone Implications
As the Eurozone’s second-largest economy, France’s instability poses systemic risks. Structural reforms in smaller economies like Germany and the Netherlands have bolstered their resilience, but France’s fiscal woes could drag down regional growth. A government collapse would likely delay critical reforms, such as labor market modernization and energy transition investments, further weakening France’s long-term competitiveness [8].
Moreover, the political chaos could embolden populist forces across Europe. Marine Le Pen’s National Rally has already positioned itself as a beneficiary of the crisis, advocating for a dissolution of the National Assembly and a return to the polls [9]. If France’s turmoil spurs a wave of anti-establishment sentiment, it could undermine the EU’s institutional cohesion and delay much-needed fiscal integration.
Investment Implications
For European investors, the risks are multifaceted. Sovereign debt portfolios with exposure to French bonds face heightened volatility, while equities in sectors like utilities and public services could suffer from prolonged strikes and policy uncertainty. The ECB’s ability to manage inflation may also be constrained if political instability forces it to prioritize financial stability over monetary tightening.
A data-driven approach is essential. Investors should monitor the outcome of the September 8 confidence vote and track the evolution of the French-German yield spread. A sustained widening beyond 100 basis points could signal a deeper crisis, warranting hedging strategies against Eurozone fragmentation.
Conclusion
France’s political instability is a microcosm of the Eurozone’s broader challenges. While structural reforms in smaller economies have improved resilience, France’s fiscal and political crisis remains a drag on regional progress. Investors must remain vigilant, balancing exposure to European markets with strategies to mitigate the risks of fragmentation. As the September 8 vote looms, the fate of France—and by extension, the Eurozone—hangs in the balance.
Source:
[1] France’s government is on the brink of collapse, again [https://www.economist.com/leaders/2025/08/28/frances-government-is-on-the-brink-of-collapse-again]
[2] French PM takes confidence vote gamble over budget woes [https://www.cnbc.com/2025/08/26/french-pm-takes-confidence-vote-gamble-over-budget-woes.html]
[3] Imminent French government collapse means deficit will stay high [https://www.oxfordeconomics.com/resource/imminent-french-government-collapse-means-deficit-will-stay-high/]
[4] Blocked out: Is France the sick man of Europe? | Opinion [https://www.dailysabah.com/opinion/op-ed/blocked-out-is-france-the-sick-man-of-europe]
[5] France 10-Year Government Bond Yield – Quote – Chart [https://tradingeconomics.com/france/government-bond-yield]
[6] The Widening French-German Yield Spread: A Warning Signal for Eurozone Unity and Sovereign Debt Portfolios [https://www.ainvest.com/news/widening-french-german-yield-spread-warning-signal-eurozone-unity-sovereign-debt-portfolios-2508/]
[7] Lagarde Calls Any Euro Area Government Collapse Worrying [https://www.bloomberg.com/news/articles/2025-09-01/lagarde-calls-any-euro-area-government-collapse-worrying]
[8] French political storm: What it means for bonds and the euro [https://think.ing.com/articles/market-impact-of-french-political-turmoil]
[9] Marine Le Pen seizes her moment to shake France [https://www.politico.eu/article/marine-le-pen-national-rally-francois-bayrou-france-no-confidence-vote/]