France’s Prime Minister François Bayrou faces an unprecedented political crisis as he scrambles to save his government ahead of a crucial confidence vote on September 8. The vote, triggered by Bayrou himself over his controversial austerity budget, could end his premiership and leave President Emmanuel Macron grappling with a deeply divided French parliament. Opposition parties have vowed to reject the plan, putting France on the brink of another major political upheaval.

Why is France in this political mess? François Bayrou sought parliamentary approval for his austerity budget, proposing €44 billion ($51 billion) in spending cuts for 2026 to repair public finances.

With a national deficit of 5.8% of GDP and a public debt exceeding 114% of GDP, the French government argues that urgent measures are necessary.

The removal of two public holidays has intensified criticism from opposition parties, who see the budget as an opportunity to topple the centrist government.

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What are Bayrou’s last-ditch efforts? In a bid to survive the vote, François Bayrou has held talks with political leaders across the spectrum, including far-right Marine Le Pen and her ally Jordan Bardella.

Left-wing MEP Raphaël Glucksmann has urged France’s Prime Minister to delay the vote to negotiate a compromise. With far-left and far-right parties controlling over 320 seats in France’s National Assembly, François Bayrou’s path to securing a majority remains highly precarious.

What is French President Macron’s position? President Emmanuel Macron has pledged to serve out his term while urging parties to find common ground on the budget. However, the fractured nature of the parliament, a result of snap elections last year, complicates any resolution. Failure to pass the budget has already unsettled investors and raised concerns across the eurozone.

Could social unrest follow in France? The “Bloquons Tout” (Block Everything) movement is planning coordinated nationwide protests on September 10 in France against the proposed budget cuts, highlighting public discontent and raising the stakes for Bayrou’s government.

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A global financial crisis seems to be brewing far away from the mainstream discourse dominated by geopolitical tensions and trade tariff uncertainties.

Unfortunately, the trigger this time is the exploding public debt of advanced economies, which is threatening to hurl the world economy over a cliff any moment.

Notwithstanding the repeated warnings of multilateral agencies, governments are piling on sovereign debt, which some refer to as the ‘global bond glut.’ Driven by unstoppable bond issuances, anxiety is gripping the bond land amid concerns of falling fiscal health of major economies from Japan to Britain to France and the US. In response, long-dated sovereign bonds yields are pushing past decadal and even multi-decadal highs.

According to the OECD’s global debt monitor, the global sovereign and corporate bond borrowing touched $100 trillion in 2024. Interestingly, last year alone saw bond issuances of $25 trillion, which is nearly three times the 2007 level. If France’s public debt is over 114% of GDP, US’s is about 121% and Japan’s stood at over 230% of GDP. The IMF and its peers often exhort governments to put their fiscal house in order by raising taxes, cutting spending and acting decisively to boost growth. But efforts on the ground are rather limited or none at all.

In other words, the precarious nature of sovereign debt has reached gigantic proportions, and as the debt super cycle reaches its final leg, it’s feared that all it takes to burn down the whole house is a drop of oil.

In fact, the likelihood of such a possibility was in display this week when unrelated developments in the US, UK, France and Japan were one step away from pulling the pin on the debt hand-grenade. The French 30-year bond yields rose to their highest level since the 2011 sovereign debt crisis to 4.5%, while in the UK, the 30-year gilt spiked to 5.68% — the highest level since 1998. The selloff spilled over across Europe taking down even fiscally sound countries with it. Consequently, the 30-year German yields rose to 3.40%, the highest level in over 10 years, and Italy’s 30-year yields jumped to 4.68% — a 14-year-high.

The situation isn’t any different across the Atlantic. Pressure on bond markets increased on September 3, when yields on 30-year US Treasuries touched 5% for the first time since July on fears of rising debt and high inflation. Within Asia, Japan, long considered as the ticking time bomb, is fighting its own fiscal and political battles.

Now, as interest rates rise, the rising cost of government debt amid unsustainable budget deficits is troubling both governments and investors. Central banks, known for their whatever-it-takes-approach indulging in massive asset purchases to manage yields, seem to have limited appetite going forward. For instance, the European Central Bank (ECB) is feared to have accumulated in excess with its unrealized paper losses estimated at euro 800 billion by one count.

Even as rising debt costs are a major worry, political instability and unmanageable debt is causing governments further distress. Last week, the crisis in European bond markets was led by the sell-off in French 10-year bonds, called OATS, which in turn became cranky citing fears of a political vacuum. Likewise, in the UK, government bond yields surged to unimaginable proportions, as the Labour government is to plug a multibillion fiscal hole in the upcoming autumn budget. Meanwhile, the US 30-year yields — which is the effective interest rate of what it would cost the US government to borrow money over three decades — shot past 5% as courts declared trade tariffs illegal, calling into question the hundreds of billions of dollars of revenue generated since their imposition in April.

The US Treasury market, considered the bedrock of the global financial system, is fighting multiple battles from high debt to the impact of tariffs on inflation and concerns about the independence of the US Federal Reserve. Besides, the US yield curve is also steepening with the spread between 2-year and 30-year bonds around 130 bps, suggesting that inflationary expectations are becoming unanchored. Worst of all, the 10-year yield is now below its average level since 1800, according to Deutsche Bank, which also believes that this is the worst decade ever for government bonds.

That’s because long-term global yields are at multiyear highs, and in some instances multidecade highs, for many governments. The reasons aren’t hard to fathom and much has to do with rising government debt and inflation. Steepening yield curves, where long-term rates rise further than short-term bonds, are the path of least resistance. US deficits are on a path to 9% within a decade, according to Moody’s.

As political and fiscal uncertainties make investors nervous about investing in long-term government bonds, they are demanding additional return for the risk of holding longer duration bonds. But rising yields are a strain on government finances, which are already getting crushed under higher spending and rising interest payments.

If risk premiums don’t increase, investors will lose trust in governments to pay back their loans, so research strategists are suggesting sales of long-term gilts to be suspended in order to relieve upward pressure on bond yields. Yields, which reflect the level of risk investors demand to hold a country’s debt, are on the rise across most Western economies, but the UK and France and most of Europe are seeing the sharpest swings.

While many European economies have a debt problem, with Greece and Spain barely escaping from the gates of hell, thanks to sovereign debt, lately, it’s France that’s on the brink of a collapse.

Its national debt stood at 114% of GDP — among the highest in Europe — and according to Eurostat, unfunded committed pension liabilities touched 400% of GDP. While the government pegged this year’s fiscal deficit at 5.4%, the market expects it to settle at 5.8% — far away from the 3% advocated by the European Union.

Compounding its woes, France is staring at a political deadlock with its centrist prime minister Francois Bayrou facing the exit over planned austerity. He proposed to cut everything to find $51 billion a year in savings, including doing away with two public holidays, but his proposals upset the bond markets with the 30-year-bond yield surging to levels not seen since the Greek debt crisis. France’s finance minister Eric Lombard stepped in with a suggestion of a potential IMF bailout, but it failed to reassure markets, forcing him to walk it back.

This is France’s second government in less than a year and sixth since 2020 and the political vacuum comes at a worse time with GDP growth pegged at just 0.8%. National debt has grown from euro 2.2 trillion during Macron’s election year of 2017 to euro 3.3 trillion and because interest rates are on the rise, Bayrou believes the cost of servicing the debt could become the single largest line item in the budget by 2029. Its debt levels are inching closer to that of Italy, which is traditionally known for weak finances and political instability.

Analysts reason that much of France’s troubles, or for that matter any other European economy, are due to the flawed policies of the European Central Bank (ECB). For instance, the ECB’s policy rates fell from over 4% in 2008 to negative and remained there for years. The negative nominal rates, along with the ECB’s asset purchase programme, pumped bond markets with central bank money. The ECB’s other measures to contain the spread between core and periphery country bonds too didn’t work as intended.

In short, most of the ECB’s policies destroyed the market mechanism, while encouraging governments to borrow at ultra-low rates. Instead of reining in debt, borrowing shot up, sowing the seeds of sovereign debt crises. A classic example is Greece, which was once hailed for boosting its GDP with massive government spending by none other than the IMF and the European Commission. But eventually it collapsed to the ground.

Meanwhile, within Asia, Japan is the flashpoint for global financial anxiety. Concerns over rising public debt, which soared to a record high of 230% of GDP, have been existing for a while, but seem to be coming to a boil amid political paralysis.

Further compounding the issue, the Bank of Japan’s abrupt shift toward tighter monetary policy, raising policy rates after 17 years, is rattling markets. With the country’s fiscal sustainability under intense scrutiny, Japan’s 30-year bond yields touched 3.286%, while yields on the 40-year bond reached their weakest level, hitting an all-time high of 3.689% in May and have remained volatile since.

Worryingly, Japan’s bond market turbulence is not confined to its borders alone. For decades now, Tokyo has been the ultra-magnet attracting all the world’s wealth with investors dipping into the country’s cheap capital to re-invest in high-yielding financial assets elsewhere. If Japanese government bond yields rise, it will spark a wave of capital flight, spilling trouble not just for Japan but also for global markets.

If the government continues to prioritize spending over fiscal consolidation, borrowing costs will continue to rise. For now, the market seems to be pricing in a worst-case scenario as there are no signs of rationalizing expenditure. Rather, it’s the opposite. According to reports, Japan’s budget requests for next fiscal have hit a record $831 billion to fund welfare programs and infrastructure to goose growth.

That said, not all believe that Japan’s fiscal situation is as bad and argue that its financial situation is often overstated, ignoring the domestic investor base comprising pension funds and insurers who provide a much-needed buffer against systemic risks.

While gross debt appears alarming, Japan’s status as a net creditor nation provides a buffer against immediate default. But that buffer is waning. As rising interest rates lead to higher borrowing costs, fiscal deficits will widen, and that alone should be a cause of concern.

Prime Minister Francois Bayrou faces an uphill battle in securing support for his unpopular plans to shore up France’s finances.

French Prime Minister Francois Bayrou last week called for parliament to hold an earlier-than-expected vote of confidence in him. Next week’s ballot could lead to the collapse of his centrist government and prompt a period of further instability in the European Union’s second biggest economy.

The vote on Monday in the National Assembly, the lower house of parliament, will see Bayrou not only try to secure approval for himself and his government but also for his unpopular budget. But opposition parties have said they will vote against him and cut short his government’s time in office.

President Emmanuel Macron, who has promised to stay on until 2027, may soon face the complex task of appointing a prime minister for the third time in one year after his hasty dissolution of parliament in June 2024.

Financial markets were rattled after Bayrou’s announcement on August 26. The interest payments on 10-year bonds rose to 3.5 percent on Monday, higher than debt-riddled Greece’s 3.36 percent.

What are Bayrou’s budget proposals?

At first blush, France’s economy appears to be doing relatively well. The government’s debt pile is lower, relative to the size of its economy, than in Italy. And the cost of financing the annual interest on its debt is well below that of the United Kingdom’s.

But Paris is struggling to keep a lid on its spending. Last year, France’s budget deficit reached 5.8 percent (168.6 billion euros, or $196bn) of its gross domestic product (GDP). The official EU target is no more than 3 percent. Investors worry that France’s persistent deficits will cause ever higher debt ratios and undermine its credit score.

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For his part, Bayrou is trying to lower the government’s borrowing to 4.6 percent of GDP in 2026 and to 2.8 percent by 2029. In turn, that would lower the overall debt-to-GDP ratio to 117.2 percent in 2029, compared with 125.3 percent if no changes are made.

His plan includes 43.8 billion euros ($51bn) in savings for 2026, 80 percent of which would come from spending cuts, such as reductions in public sector hiring, suspending pension indexation to inflation and scrapping two public holidays.

Greater taxes on high earners are among other proposals that have been considered.

The prime minister’s proposals come on top of Macron’s unpopular 2023 move to raise France’s retirement age by two years to 64. At the time, the president argued that excessive pension payments were a drag on the country’s finances.

Before the confidence vote, the French leadership has again tried to shape the debate around the country’s future.

“The issue, the question, is not the fate of the prime minister or… even the fate of the government. The question is the fate of France,” Bayrou said.

On August 26, Finance Minister Eric Lombard warned that unless France gets its debt under control, interventions from the International Monetary Fund, the global lender of last resort – typically for emerging market countries – “is a risk that is in front of us”.

How have political parties responded to Bayrou’s gamble?

Because Bayrou’s centrist and allied conservative coalition does not hold an outright majority in France’s parliament, the prime minister will have to rely on the support – or at least abstention – of adversaries on the left and the right to pass his budget.

But opposition parties, which hold more than 320 seats in the 577-seat National Assembly, have already said they would vote against Bayrou. If they stick to that, it would be impossible for the current government to survive.

Hard-left lawmakers from Unbowed said they want to “make the government fall”, and the Socialists have promised to reject an “unfair budget”. The national secretary of the Greens, Marine Tondelier, described Bayrou’s confidence vote as “a resignation de facto”.

Socialist Party leader Olivier Faure said it would vote against the government. Bayrou had “chosen to go”, Faure said.

Elsewhere, Jordan Bardella, head of the National Rally, said his far-right party would “never vote in favour of a government whose decisions are making the French suffer”. Bayrou in effect has announced “the end of his government”, Bardella said.

How have financial markets responded?

Political instability has increased the cost of government debt (otherwise known as the yield) and lowered the value of key French stocks with shares in the banks BNP Paribas, Credit Agricole and Societe Generale all down 8 to 10 percent last week.

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For Davide Oneglia, a European analyst at the political research firm TS Lombard, continued political wrangling has amplified the difference between French and German 10-year borrowing costs.

Since the start of this year, France’s borrowing premium over Germany – a key measure of macroeconomic risk – has widened by almost 1 percentage point. France’s 10-year yields are now among the highest in the EU, recently surpassing Greece’s and Portugal’s.

“The political situation is causing wider spreads [between France’s borrowing costs and its European peers]. We’re not at a full-blown debt crisis yet, but the fiscal situation is becoming more urgent,” Oneglia told Al Jazeera.

In December, the Moody’s rating agency lowered France’s credit score from “Aa3” from “Aa2” amid pressure on Paris’s strained finances. Moody’s move put it in line with those from rival agencies S&P and Fitch, which have also downgraded their ratings for France since 2023.

What could happen next?

Most commentators said Bayrou will likely lose next week’s confidence vote, forcing Macron to replace him with yet another prime minister. That would return the president to an impasse over the budget, which he’s failed to tackle since snap elections last year.

It also wouldn’t change the arithmetic in parliament. And because Macron is unlikely to appoint a premier who advocates a looser fiscal policy, which could win the support of parliament, political gridlock looks set to follow.

Some politicians, including Marine Le Pen of the National Rally, have urged Macron to call new legislative elections in the hope of reshuffling the political deck before France’s presidential election in 2027. But the French president will be wary of that option.

The latest opinion polls show no material change in voting intentions since last year’s vote, which resulted in the current parliament. Meanwhile, the prospects of a National Rally victory in the next presidential election are stronger than ever: The party has been leading in polls for that vote consistently over the past two years. In May, two polls had the National Rally’s likely candidate, Jordan Bardella, at 30 percent and 31 percent respectively, with the next candidate at 21 percent.

In the event of a National Rally presidential win, Oneglia believes the Italian elections in 2022 offer a useful blueprint. “Meloni’s right-wing populist party quickly became fiscally centrist when they came into power,” he said, referring to Italian Prime Minister Giorgia Meloni.

“It wouldn’t surprise me to see a similar outcome in France in 2027 [if the National Rally were to win]. Until then, I expect the political situation to assume a ‘kicking into the long grass’ mode,” he said.

As France’s minority government hovers on the brink of collapse over its austerity plans, fears are mounting that the debt of the EU’s second-largest economy is spinning out of control.

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.

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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.

Amid disagreements between the French government and parliament over Prime Minister François Bayrou’s plan to navigate the current financial crisis and a lack of consensus on how to manage government debt, the possibility of the Prime Minister’s departure and further deterioration of the situation has significantly increased.

According to Sky News, the French government is on the brink of collapse and may also face a debt crisis.

The British news outlet reports that the political deadlock in France could lead, in an unprecedented move since 2020, to the exit of France’s sixth prime minister—at a time when the economy has minimal financial capacity to handle the crisis.

Sky News further examines how France reached this critical point: many of Europe’s largest economies are also grappling with debt problems, and the situation in the United Kingdom is nearly as severe as in France.

Published data show that bond yields—which indicate the level of risk investors accept for holding a country’s debt—are rising across most Western economies. However, in France and the UK, these yields have surged even more, diverging from the trend in other European countries.

This is not the first time France faces a financial crisis. The country has long struggled with excessive spending, and so far, no clear political solution has been seen to control it.

Observers now warn that this crisis could not only risk a resurgence of social unrest—such as the Yellow Vest protests of 2018 and subsequent violence over pension and price reforms—but also trigger broader economic instability.

Bayrou intends to implement a €44 billion budget plan that includes widespread spending cuts and the elimination of two public holidays. However, this plan itself may push him toward leaving the government.

Opposition groups in parliament have refused to support Bayrou or grant a vote of confidence in his proposed plan. Should he be forced to resign, French President Emmanuel Macron will likely have to appoint another replacement. Last year, he already had to part ways with his previously appointed Prime Minister, Michel Barnier.

Opposition parties agree that France’s debt and budget deficit are extremely high, but they disagree on how to reduce them and who should bear the costs.