“History doesn’t repeat, but it often rhymes,” is a famous saying attributed to American author Mark Twain. When you read today’s news about the French government and its debt situation, it’s not unlikely that the saying comes to mind.
The European Debt Crisis Revisited
It has been about 15 years since the European Union faced its first severe crisis. As a result of the aftermath of the Great Financial Crisis in 2008, the continent stumbled into a multi-year debt crisis that brought enormous economic hardship to many members of the Eurozone.
Back then, it was the so-called PIIGS states (Portugal, Ireland, Italy, Greece, and Spain) that got into the spotlight of financial markets. After the euro was implemented in 2002, these countries were able to issue government debt at rates they had never seen before. Unsurprisingly, politicians couldn’t withstand the pressure and issued more and more debt in an attempt to bring their countries into prosperity.
As always, things that sound too good to be true turn out not to be true. And when the appetite for new debt and risky credit abated after the US housing bubble started to burst, it was only a matter of time before the crisis would spread and affect European countries that piled up debt under the low-interest rate regime.
Interest rate spreads of government bonds compared to German Bunds (figuratively the “US treasury bond” of the Eurozone) widened significantly. Mario Draghi, then the head of the ECB, intervened verbally with his famous “Whatever It Takes” speech, and interest rate spreads began to narrow again. Greece suffered extraordinarily under the crisis. Things deteriorated to the point of requiring financial support from the EU and the IMF.
The EU also put political instruments in place, which somehow wiggled around the “no-bailout” clause from the Maastricht Treaty. In the end, one could say that the crisis wasn’t solved, but instead covered up by political actions aimed at alleviating the nervousness of financial markets.
Debt Accumulation of the French Government
Although France was not necessarily a fiscally frugal country at the time, it did not come into the spotlight. Notably, France’s interest rate risk spread over German Bunds was substantially higher during the height of the sovereign debt crisis in the 2010s compared to its current level.
What changed is the debt situation of the French government. In 2000, France’s debt-to-GDP ratio stood at approximately 60 percent, and it has continued to rise steadily since then. Until 2010, it had climbed to 84 percent. At the end of 2019, it was close to 100 percent and had gone up to 113 percent by the end of 2024. In percentage terms, its debt rose much faster than Italy’s.
What’s also noteworthy is that the ratio was similar to Germany’s until 2008, after which it diverged significantly.
Back in the 2010s, however, when interest rates were falling and near zero, it was much easier to refinance that debt. The expansion of the deficit had limited consequences, as borrowing became cheaper and cheaper.
When interest rates begin to rise, however, one must borrow increasingly more money just to pay the interest on the debt. In France, the portion of debt-service costs is on its way to becoming the second-largest budget item by 2026, Le Monde reported:
According to government forecasts, debt service is expected to be the second-largest item of public spending in 2026, with a projected €75 billion. This would put it well ahead of national education and defense spending, but behind tax reimbursements to businesses and individuals (linked to tax breaks and other incentive schemes).
Although the size of France’s debt is still far lower than in Greece, financial markets are becoming concerned due to the trajectory of the debt. For example, while Greece has implemented fiscal measures and economic reforms to reduce its deficit and has experienced solid economic growth in recent years, France has seen increasing deficits since 2022. Currently, the IMF even anticipates that France will have a higher debt-to-GDP ratio than Greece.
An Ongoing Political Crisis
Beyond the darkening fiscal situation, France is also in a political crisis. During the sovereign debt crisis of the 2010s, France remained a stable political environment. These days are long gone now.
In 2022, Emmanuel Macron secured a victory for the presidency that was closer than anticipated against far-right candidate Marine Le Pen. In the spring of 2024, Macron called for snap elections, which resulted in a significant win for the far-right in the first round. Still, the second round ended with a surprising victory of the leftist New-Popular-Front.
Michel Barnier, a former EU Commissioner, became prime minister in September, only to lose a confidence vote in December 2024 after he failed to secure a majority for his Budget. He became the shortest-serving prime minister of France’s Fifth Republic.
The Current Political Crisis
Barnier’s successor, Francois Bayrou, was unable to calm the political turbulence and solve the budget problems. He invoked special constitutional powers to pass the 2025 budget and used concessions to the left to survive several confidence votes.
In March, Bayrou proposed extending taxes on the wealthy and a mechanism that forces individuals with “excessive savings” to invest in defense expenditures. French academics rallied behind him and posted an op-ed in Le Monde in support of taxing the “ultra-rich.” Yet, evidence from Norway suggests that such actions could lead to lower, not higher, tax revenues.
So far, however, Bayrou hasn’t been able to secure a majority for the 2026 budget, which also aims for drastic spending cuts. As a result, he decided to take action: At a press conference on August 25, he called for a no-confidence vote in Parliament, which he lost on September 8.
Calling for the IMF: A Political Maneuver
As a result, risk spreads on French government bonds spiked to their highest level since January. Finance Minister Eric Lombard warned that snap elections (following Bayrou’s loss of the confidence vote) could even result in an IMF bailout. His comment poured more fuel on the fire.
Nevertheless, the warnings were clearly a political maneuver to put pressure on the members of parliament to support Bayrou on September 8. There’s no hard evidence that France will need help from the IMF at the moment, something that Christine Lagarde (head of the ECB) confirmed too. Price action of government bonds after Bayrou’s loss didn’t lead to widening risk spreads for French government bonds.
France: A Warning To The United States
While one can only speculate, the most probable outcome is a combination of higher taxes and increased government spending, which then falls short of expectations and drives the debt-to-GDP ratio higher. Financial markets will judge the measures as successful when there’s clarity on their effectiveness.
Yet, Americans should watch the developments in France because it could give an idea of where the US is headed if it also continues to pile up debt. Although President Trump generally promotes low taxes and is pro-business, he has also stated that he’s open to taxing wealthy Americans more when necessary. Nevertheless, such a scenario seems unlikely at the moment. After all, the United States isn’t France, and still has a significantly lower debt-to-GDP ratio.
But piling up debt above levels typically seen only in wartime, in an era where interest rates have just returned to historically normal levels, could also lead to increased nervousness in financial markets at some point. If such a case were to arise, the US might also face a similar day of reckoning. Nevertheless, the US also benefits from its privilege to issue the world’s reserve currency. This privilege is unlikely to disappear in the near future due to the lack of viable alternatives.
