France and the risk the euro cannot contain

France still pays its debts and retains an economy capable of sustaining them. What is beginning to fail is confidence that its Government can halt the rise in borrowing. Debt is close to 119% of GDP, growth is barely moving and every budget opens a new dispute over taxes, pensions and public spending. Investors are already charging more to lend to it; each rise makes refinancing more expensive and leaves less money for other priorities. The presidential campaign adds uncertainty, but does not on its own explain the problem. France is the euro area’s second-largest economy, and its bonds, its banks and its fiscal decisions are deeply bound up with the rest of the Union. If Paris cannot agree on how to manage its debt, Europe will have to face the consequences.

France keeps paying its debts, yet the yield on its bonds is rising as if investors were beginning to wonder how long it can go on doing so without changing course. That is the difference between a default crisis and the one France faces. There is no date on which the State runs out of money; what there is, is a country that needs to borrow more every year, that grows little and that cannot agree on who is going to pay the bill.

For the euro, that matters far more than an abstract argument over whether public debt of 119% of GDP is too much. France is the euro area’s second-largest economy, one of its biggest debt issuers and a central pillar of the relationship with Germany. When its bonds lose value, the problem does not stay in Paris. It affects banks, investors and governments that use French debt as a benchmark. And it forces the European Central Bank to think about how to prevent a national strain from breaking financial conditions across the whole area.

On 30 September the yield on the French ten-year bond came close to 4.85%, its highest level in eighteen years. That figure alone is not enough to herald a catastrophe, since one could argue that rates have also risen in other markets, pushed up by more expensive energy and by the expectation that money will stay dear. But France has become more expensive than several of its neighbours. Investors are not only reacting to what is happening in the world. They are also pricing in that the French Government may lack the political strength to put its finances in order.

Debt reached €3.596 trillion at the end of June, 119% of GDP, and the Government expects it to exceed 121% in 2027. This year’s deficit is now estimated at 5.4% of GDP, and the Executive has pushed back to 2027 its target of bringing it down to 5%. These are large numbers, but the point is not to repeat them until they sound alarming; it is to understand what drives them. France has been spending more than it collects for decades, and the pandemic made the gap steeper; it did not create it.

So why is it so hard to close? Because the deficit is not an item that can be removed without touching anything else. It is intertwined with the pension system, public services, support for households, taxes and the State’s investment decisions. The 2027 budget proposes an enormous effort, with tax rises and cuts relative to what would be spent if no measures were taken. Every party can defend the need to put the accounts in order in the abstract. When the time comes to choose which tax to raise or which benefit to restrain, the conversation changes.

INSEE expects France to grow by barely 0.4% this year. The forecast for Germany is around 1%, for Italy 0.9% and for Spain 2.6%. If activity barely advances, the State collects less than it expected and companies invest more cautiously. Raising taxes can slow consumption; cutting spending can subtract activity in the short term. And if growth weakens, the debt weighs more heavily relative to the economy that has to sustain it. It is possible to design an adjustment that does not destroy growth, but it requires setting priorities and holding course. France is debating the first and has no guarantee of the second.

Debt does not become dangerous merely by being large. It becomes dangerous when the country that must manage it cannot decide how to do so.

That is the political component of the crisis, and it neither begins nor ends with the next presidential election. Since the 2024 legislative elections the National Assembly has been fragmented and no bloc has an absolute majority. In January this year Prime Minister Sébastien Lecornu resorted to Article 49.3 to push the budget through without an ordinary vote, after months of deadlock. Now the new budget once again depends on difficult agreements, while the parties already weigh every decision with the 2027 campaign in mind.

The polls make the radicals at both political extremes the favourites to contest the presidency in the second round: Marine Le Pen for the far right and Jean-Luc Mélenchon for the far left. Édouard Philippe appears as a possible competitive candidate if the centre manages to avoid an internal fight. But there is still time, the parties have not settled their candidacies and current voting intentions do not by themselves predict who will govern. Markets are watching which programmes gain ground and whether the next Government will have room to pass a budget. So the uncertainty will not disappear automatically with the new president.

France is also running out of an advantage that for years seemed natural. Its bonds were regarded as a relatively safe asset, close to German ones in liquidity and quality. Now the spread between the two has passed 110 basis points, its widest since the euro crisis of 2012. That does not mean France is Greece. France has a much larger economy, a powerful tax base and continues to finance itself normally. But unlike Greece, French debt carries far greater weight within the European financial system. If the market doubts it, it would be a mistake to treat it as a mere peripheral episode, as was done with Greece.

Paralysis in the Assembly complicates any lasting adjustment. The presidential campaign adds pressure, but the political uncertainty goes beyond who wins.

France plans to issue some €340 billion of medium and long-term debt in 2027, compared with €310 billion this year. Part of it will go to refinancing bonds placed during the pandemic that are now maturing. In other words, it is not all new borrowing, although it does expose the Treasury to the current price of money. The State estimates that interest will exceed €90 billion next year. And this figure matters a great deal: the forecast is telling us that debt service will exceed spending on education or the growing spending on defence. Every old bond that matures and is replaced by a more expensive one shrinks the room available for the rest of the budget.

This also affects the banks. French lenders hold public debt and depend on the markets for their funding. If bonds fall, their portfolios lose value; if uncertainty rises, their funding costs may go up. In turn, more expensive credit passes through to companies and families, who postpone investment or purchases. This is the link between State and banks that made Europe’s sovereign crises so difficult. France is not caught in a banking spiral today, but the longer the strain lasts, the more channels it will have to reach the everyday economy.

The single currency thus faces a contradiction that has gone years without being fully resolved. Countries share a currency and a monetary policy, but each State decides its own taxes and spending. The ECB sets rates for the euro area, not for France. Nor can Paris devalue a franc to make its exports cheaper and regain competitiveness. When investors treat countries differently, financing costs diverge, even though they all use the same currency. The European Central Bank needs its policy to reach companies and households in every country in a similar way. If the French premium rises for fiscal and political reasons, that transmission becomes harder.

A rise in the French premium can spill over into banks, credit and the financing of other European countries. The ECB can halt disorderly fragmentation, but it cannot resolve the fiscal disagreement in Paris.

The ECB has an instrument to halt disorderly movements that threaten monetary transmission. It is not a blank cheque to keep any Government’s financing costs low. Its design includes fiscal and macroeconomic criteria, and that is where the political limit appears. If the rise in the premium reflects irrational panic that threatens to fragment the market, intervening may fall within its mandate. But if it reflects distrust of a budgetary path that Paris is not correcting, the ECB cannot stand in for the Government and Parliament.

That is why the French crisis could change the European debate on common debt. Emmanuel Macron argues that the Union should issue joint bonds to invest in technology, energy and strategic autonomy. It makes sense to share the financing of projects whose benefit is also shared. But creditor governments fear ending up shouldering other countries’ fiscal decisions. And France’s difficulty in agreeing its budget weakens the case for broader mutualisation. It is not enough to argue that Europe needs more investment. One also has to explain who controls the money, who bears the losses and what happens if a Government departs from the agreed rules.

France will have to refinance a record volume of debt. Rising interest payments absorb resources the State could devote to other spending.

I do not think the outcome will be a French exit from the euro or a default in the short term. That reading confuses a cumulative risk with an immediate collapse. What I do see is a gradual erosion of the capacity to choose. If debt costs more, the State will pay more interest; if growth flags, its revenue will grow less; and if politicians do not agree on an adjustment, investors will demand a higher premium. The Government ends up with less room to respond to a recession, an energy crisis or a new defence need. Every future problem starts with a larger share of the budget already committed.

France’s test is not to convince the markets that the country will pay tomorrow. They take that for granted. It is to show that it can manage its debt without passing the whole bill to households, without stifling growth and without asking the ECB to paper over the political disagreement. France still has the resources to do so. What it does not have is much time left to keep pretending that the arithmetic can wait until the next campaign is over. The single currency can survive an indebted France; what it cannot afford indefinitely is a France unable to decide what to do about that debt.