analysis

France is becoming a test for Europe; today, Prime Minister Bayrou poses a vote of confidence. Markets are trembling at the prospect of a repeat of the euro debt crisis – but is France really the new Greece?

Investors are becoming increasingly nervous on the markets: Today, French Prime Minister François Bayrou plans to put a vote of confidence in the National Assembly in the dispute over his drastic austerity plans.

Experts predict the government will collapse. After Michel Barnier, this would be the second prime minister to fail due to the inability to reform our neighboring country. New protests in the style of the Yellow Vests are looming.

Rising bond yields as a warning signal

Interest rates on French government bonds rose rapidly in the run-up to the crisis. The yield on 30-year bonds climbed above 4.5 percent at times last week, reaching a 16-year high. Ten-year government bonds peaked at over 3.5 percent—the highest yield since 2009.

Even if the current level doesn't indicate panic, rising interest rates do indicate growing investor mistrust. Risk premiums on French securities are rising, making it increasingly expensive for the French government to raise money on the financial markets.

Fear of a repeat of the euro debt crisis

Some market observers and economists are already reminded of the euro debt crisis that began in 2010. The big difference: While back then it was primarily a crisis affecting the southern eurozone countries, this time it's a core country where developments are heading in the completely wrong direction.

Fidel Martin, president of the French financial advisory firm Exoé, sees the rise in long-term French interest rates as a clear warning."The higher yields rise, the heavier the state's debt burden becomes," he points out.

And Eckhard Schulte, CEO of asset manager MainSky Asset Management, emphasizes:"In France, the debt situation is exploding; the country now has the least sustainable debt trend of all the countries we monitor – after only the USA and Italy."

The euro debt crisis

The euro debt crisis that began in 2010 was the most severe test for the monetary union to date. It was triggered by the rapidly growing national debt of several countries – first and foremost Greece, but also Portugal, Ireland, Spain, Italy, and later Cyprus. The yields on their government bonds rose dramatically, in some cases, making refinancing on the capital markets virtually impossible. Only through massive interventions – including rescue packages and the ECB's announcement that it would do"whatever it takes" to preserve the euro – was market confidence restored.

This is how high the French debt is

In fact, the French government's debt burden is enormous: in absolute terms, it amounted to 3.345 trillion euros in the first quarter of the current year – no other country in the eurozone has more debt than France.

The country is thus notoriously failing to meet the Maastricht criteria; last year the government deficit was 5.8 percent of gross domestic product (GDP).

The debt ratio is also far beyond the euro budget rules: In 2024, total government debt amounted to 113 percent of GDP. In the first quarter, it climbed to 114.1 percent.

This makes the second-largest economy in the euro zone one of the countries with the highest debt ratios in the currency area. Only Italy (137.9 percent) and Greece (152.5 percent) have higher debt ratios.

Debt ratios in comparison

According to the International Monetary Fund (IMF), France's debt ratio is expected to rise to more than 128 percent by 2030. But even with the 116 percent forecast for this year, France is already in the same sphere as the countries affected by the euro debt crisis.

By comparison, Germany had a debt ratio of 62.5 percent in 2024. According to a forecast by the Bundesbank, the ratio is expected to rise to around 66 percent by 2027.

France facing rating downgrade?

The major rating agencies are keeping an eye on all these developments – and they are increasingly critical of France. In the spring, both Fitch and Standard & Poor's confirmed their ratings but gave them a negative outlook, meaning a downgrade is imminent.

At the time, Fitch primarily criticized the French government's high share of spending, which amounted to more than 57 percent of GDP. This was precisely where Prime Minister Bayrou wanted to cut costs and take drastic countermeasures with his austerity package, aiming to cut the budget by €44 billion. But this is unlikely to happen now.

"Whatever it takes"

The next review of Fitch's France rating will take place this Friday – just days after Bayrou's vote of confidence today. A downgrade would rekindle fears on the stock markets of a Euro debt crisis 2.0.

Then the head of the European Central Bank (ECB), Christine Lagarde, might also be called upon: After all, it was her predecessor's courageous declaration of war that brought about the turnaround in the Euro debt crisis 1.0 and calmed the markets.

Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.

Mario Draghi, then head of the ECB, July 26, 2012