France finds itself facing one of its most difficult financial crises in decades, after years of high government spending turned into an increasing burden on public finances, at a time when the cost of borrowing is rising and investor appetite for French bonds is declining, while the political system seems unable to agree on corrective measures capable of stopping the deterioration of the deficit and debt.
With the yield on French 10-year government bonds approaching 5 percent, the highest level since 2002, markets are increasingly concerned that the second largest economy in the euro area is entering a vicious circle, in which the cost of debt service rises, reducing the government’s ability to finance investments and social spending, which in turn leads to increased pressures on public finances.
France's debt amounts to about $4 trillion, or approximately 119 percent of the gross domestic product, while estimates indicate that the cost of debt service may reach about $100 billion in 2027. By 2030, the cost of debt service is expected to rise by about 59 percent, becoming one of the largest items of government spending, and may exceed military spending by the end of the decade.
The problem is not limited to the size of the current debt. France faces maturities exceeding $1 trillion until 2030, while it intends to issue nearly $380 billion in new debt next year, a record level, at a time when some traditional sources of demand for French bonds are no longer as strong as they were during the years of low interest rates.
The French Central Bank no longer buys government bonds, but rather allows its portfolio to shrink as the bonds mature, while Japanese asset managers who were stable investors in French bonds reduced their exposure to the market. As for the hedge funds that entered to cover part of the void, some of them suffered losses as market volatility intensified.
These data and numbers are based on reports published by the Wall Street Journal and the New York Times, which dealt with the escalation of debt and borrowing burdens in France, in addition to the protests, strikes, and political stagnation that precedes the presidential elections scheduled for the spring of 2027.
From “no matter what the cost” to the debt bill
The roots of the crisis go back to long years of high public spending, as France has not recorded a balanced budget since 1974. Over the decades, the state has expanded funding for a wide system of social services and government support, which has made reducing spending more difficult from an economic and political standpoint.
When Emmanuel Macron assumed the presidency in 2017, he presented himself as a reformer capable of returning public finances to a more disciplined path. He implemented labor market reforms, reduced corporate taxes, and abolished the wealth tax, measures that, according to his supporters, helped support growth and reduce the deficit to less than the European limit of 3 percent of output in the first years of his presidency.
But successive crises gradually prompted Macron to use government spending as a main tool to contain the unrest.
This began during the “yellow vest” protests, when the government allocated at least 10 billion euros to calm the protest movement, and then spending expanded significantly during the “Covid-19” pandemic and the energy crisis that followed the Russian invasion of Ukraine.
Macron's slogan during that period was "no matter the cost," referring to the government's willingness to provide financial support to companies and families, no matter how high the bill.
But some measures initially presented as temporary have turned into ongoing financial commitments. The government reduced corporate taxes by an additional 10 billion euros annually, raised the wages of workers in the public health care sector, and financed a broad program to support the wages of company workers during the pandemic.
Some support programs did not end after the closures ended. Businesses, from small restaurants to large institutions, continued to benefit from programs that were originally intended to serve as temporary support during the crisis.
The government then spent tens of billions of euros on subsidizing energy prices after the war in Ukraine, by setting a ceiling on electricity and gas prices, and part of these subsidies continued even after European gas supplies improved.
Errors in calculations reveal the size of the gap
The effects of this policy began to become clear in 2023, when the French Ministry of Finance discovered that tax revenues came in well below expectations, while some spending items exceeded its estimates.
In a confidential memorandum received by then-Finance Minister Bruno Le Maire in December 2023, Treasury officials warned of a shortfall in tax revenues, noting that an exceptional tax imposed on energy producers to recover part of the cost of subsidizing energy prices had generated only part of the revenues the government had expected.
Value-added tax revenues were also below target, while the cost of government spending was underestimated by about 3 billion euros.
Treasury officials estimated at the time that these errors could raise the 2023 budget deficit to 5.2 percent of output, compared to a previous estimate of 4.9 percent, which would have left a gap of about 9.2 billion euros in public finances.
The following February, another memo showed that the deficit could reach 5.6 percent in 2023, while the 2024 deficit could widen to 5.7 percent, compared to an estimate of 4.4 percent in the budget approved by Parliament.
Le Maire now has a gap of approximately 40 billion euros to fill, but he believes that the government cannot make cuts of the required size without the approval of Parliament.
Politics disrupts treatment
Here economic calculations collided with political reality.
The government needed to cut spending, but any attempt to pass sweeping austerity measures threatened to ignite a new confrontation within the National Assembly, divided between the far-right, the pro-Macron centre, and a broad left-wing coalition.
Former Prime Minister Gabriel Attal preferred to use the government's regulatory powers to make cuts without opening a broad parliamentary battle, fearing that the opposition would demand an increase in taxes in return, which might harm growth.
But the election factor was also present
With European Parliament elections approaching in June 2024, Macron has been reluctant to enter into a major financial confrontation with voters. After Marine Le Pen's National Rally party achieved strong results in the European elections, Macron made a surprising decision to dissolve the National Assembly and call early elections.
Instead of the election strengthening his position, the result resulted in a parliament divided into three main camps, making it more difficult to pass a budget that included deep spending cuts.
Since then, the French budget has become the hostage of repeated political negotiations, and prime ministers who tried to impose measures to restore discipline to public finances fell.
The French budget deficit has exceeded 5 percent of output over the past three years, while recent estimates indicate that it may reach 6.8 percent by 2030 if more stringent measures are not taken.
Markets begin to impose discipline
For investors, the problem is no longer just numbers in the budget, but rather an issue of the state's ability to make the decisions necessary to change course.
Markets have their say through bond prices.
With the yield on French 10-year bonds rising to levels approaching 5 percent, France is paying to borrow more from countries that were previously considered among the most fragile cases in the eurozone, such as Italy and Greece.
Investors warn that the rise in interest rates has come at the worst possible time for France, as the government is forced to refinance huge amounts of debt issued in the low-interest era.
Karminiac Investment Portfolio Advisor Kevin Thuset points to a simple but very harsh equation: If the interest rate on debt exceeds the growth rate of the economy, the debt will continue to rise unless significant spending cuts are made, according to what the Wall Street Journal reported.
This is what economists call the “snowball effect,” where increased debt leads to higher interest payments, which in turn raises the deficit and debt, so the government needs to borrow more, and so the cycle repeats.
The Organization for Economic Co-operation and Development estimates that France's debt could reach 200 percent of GDP by 2050 if expenditures are not reduced.
A financial crisis coincides with a social crisis
These developments do not take place in a political vacuum.
France enters the fall of 2026 amid public sector strikes, student protests, school closures, port blockades, and unrest linked to rising costs of living and fuel prices.
Teachers and government employees are planning protests against wage freeze proposals, while the government struggles to pass the budget.
Hundreds of schools also witnessed unrest and closures, while student protests became one of the most visible manifestations of anger, with complaints of declining funding, deteriorating facilities, and a shortage of teachers.
This social crisis overlaps with the rise in oil and gas prices resulting from the war with Iran, which brings to mind the “yellow vest” protests that began in 2018 due to high fuel prices before turning into a broader movement against the government’s economic and social policies.
Macron seems aware of the sensitivity of repeating this scenario. Last week, he chaired a meeting of G7 leaders, during which it was agreed to release 100 million barrels of diesel and crude oil from reserves, in an attempt to ease pressure on fuel prices.
But energy prices are only part of the problem.
At the same time, France faces a rise in the costs of health care and pensions as the population ages, in addition to an increase in military spending in light of the war in Ukraine and the decline of the American security role in Europe.
A budget at the mercy of the extreme right
Prime Minister Sebastian Lecorno is trying to pass a budget that includes tax increases and a freeze on some social spending programs, including housing aid and family subsidies.
But its success depends largely on the position of the National Rally party led by Marine Le Pen, which has 118 seats out of 577 in the National Assembly and is the largest single party in Parliament.
Analysts believe that Le Pen may choose to abstain from voting rather than drop the budget, especially since she may need to avoid bearing responsibility for a larger financial crisis if she wins the presidential elections scheduled for next April.
Markets are awaiting a speech by Le Pen about her economic program, searching for indications of the extent to which her party’s position on public finances has changed since her previous presidential campaign in 2022.
Le Pen faces a strict test: she needs to reassure bond markets that her potential government will not increase the deficit, but at the same time she relies on political rhetoric critical of the European Union and its fiscal policies.
This is why some analysts believe that the upcoming French elections may be a pivotal moment no less important than the British referendum on leaving the European Union in 2016, not only because of the economy, but because of the future of France’s relationship with the European Union.
Is France approaching a debt crisis?
Despite all these pressures, investors do not see a Greek-style debt crisis as inevitable.
The euro zone today has more sophisticated financial and monetary tools than it did during the sovereign debt crisis more than a decade ago, and the European Central Bank represents an important safety net in the event of escalating market turmoil.
But the problem is that France is not Greece.
The size of its economy and its central role in the European Union make any French crisis much larger than just a problem for one country. Therefore, French bond market turmoil could quickly spread to other European markets and increase the cost of financing in the entire euro area.
At the same time, the continuation of the current situation carries an economic cost even without a full-scale financial crisis, as an increasing share of the state's resources will go to debt servicing rather than investing in infrastructure, education, industrial transformation, or defense.
American economist Kenneth Rogoff describes the situation as “a train moving slowly toward disaster,” noting that bond markets have begun to reflect the unsustainability of the French financial path, even if it has not yet reached the point of panic.
Here lies the fundamental dilemma for France: markets are demanding reductions in spending and deficits, while voters are protesting the decline in services and the rising cost of living, and politicians are afraid to pay the price for austerity measures before the elections.
Thus, France's crisis is no longer just an arithmetic problem that can be solved by increasing taxes or reducing spending in one budget. Rather, it has become a test of the state's ability to redefine the relationship between public spending and growth, and between the welfare state and the ability to finance it.
After decades of relying on public spending to alleviate crises, France finds itself facing a more difficult reality: the money that seemed endlessly available when interest rates were low is no longer free, and markets are beginning to demand the price of years of accumulated spending.
