France's political turmoil is causing a financial headache. But why is the country in such a debt crisis?
In a dramatic turn of events, France bid farewell to its fifth prime minister in under two years, just as the 2026 budget was due. Sébastien Lecornu's resignation, following a cabinet reshuffle, and François Bayrou's departure last month due to a rejected savings plan, have left the country in a bind. With the budget deadline looming, can France get its finances in order?
France's spending habits are a cause for concern. As the biggest spender in Europe relative to its economic output, its debt burden is second only to Greece and Italy, the stars of the 2011 European debt crisis. The country's budget deficit, the gap between spending and revenue, is among the highest in the EU, according to Eurostat.
The recent political chaos has bond investors on edge. Since June 2024, France's financial situation has been under scrutiny, leading to higher borrowing costs. But what's causing this market turmoil?
A significant chunk of France's spending goes towards social protection, including pension payments and unemployment benefits. In fact, the country's social protection spending is the second-highest in the EU, and quite liberal by global standards. This, combined with state pensions that are more generous than in many other rich countries, adds up to a hefty bill.
The government also funds unique benefits, like financial support for families hiring childcare workers. "We reimburse a lot of things we can't afford," says Alexandra Roulet, an economics professor. The response to recent crises, like COVID-19 and the energy price spike, has further increased the debt.
Political divisions over the solution—cut spending or raise taxes—are intense, especially with already high taxes. France's tax revenue is the highest in the EU, at 45.6% of GDP. Protests against austerity measures and pension reforms have made budget agreements challenging.
Macron's tax cuts for businesses and the removal of the wealth tax early in his presidency haven't helped. These moves, along with a planned eco-friendly tax hike on gasoline, have earned him the title of "president of the rich." France's debt burden is among the highest in the developed world, at 116.5% of GDP in 2023, compared to 122.9% in the US.
Investors now see France as a riskier borrower than Greece, Italy, Portugal, and Spain, the 2011 debt crisis countries. The lack of progress in fixing public finances, traced back to Macron's 2024 parliament dissolution, has caused this market unrest. Holger Schmieding, an economist, calls France the "weak link" in the eurozone.
France's borrowing costs have risen, especially compared to Italy, despite Italy's larger debt and weaker growth. Italy's stable coalition government and efforts to reduce the deficit provide some reassurance. But France's political instability and potential extreme leadership could cause a bond market panic.
Will France's debt crisis lead to another European financial meltdown? Analysts aren't sure, but the situation is delicate. The country's financial future hangs in the balance, with the next presidential election a crucial turning point. What do you think? Is France headed for a financial storm, or can it weather the debt crisis?
