France's public finances in crisis: When the eurozone falters

The state of French public finances is becoming increasingly worrying. It has long been clear that the last budget debate under President Emmanuel Macron would be the most difficult. Since the dissolution of parliament in June 2024, the country has no longer been governed stably, and now there are presidential elections - in which a right-wing populist with no experience in government has better chances than ever of being victorious. So no one believed in the big austerity package and an overdue pension reform in the 2027 budget anyway.

But no one expected that the explosive cocktail of political instability, high levels of new debt and meager economic growth would now be joined by rapidly rising bond yields. The result: Debt service, already the largest budget item after defense and education, is rising unabated and is approaching the 100 billion euro mark. To ensure that new debt does not rise to even more alarming levels, the state must sharply increase taxes or cut spending.

France's debt woes have long had a European dimension. Paris now finally lacks the money for major new programs, for example in the arms sector or in the area of ​​infrastructure. Above all, there are now legitimate concerns about the stability of the Eurozone. France's gross domestic product is twelve times higher than Greece's. A debt crisis in the monetary union's second-largest economy would have a completely different scope than what Europe experienced with Greece.

We haven't gotten that far yet; spending cuts and structural reforms are still within the realm of possibility. The French state is capable of acting. There is awareness of the seriousness of the financial policy problems. But there is not much time left for a financial policy turnaround. The fact that bond yields in France have been rising more sharply than in Germany and Italy for weeks makes it clear that concerns are also growing on the financial markets. Not only in the ECB Tower, everyone is aware that if France falters, the Eurozone falters.