Could France’s financial turmoil spark eurozone debt disaster? – DW – 09/08/2025 | EUROtoday

Shortly earlier than Francois Bayrou misplaced a confidence vote in parliament on Monday (September 8), the French prime minister warned that France’s fiscal woes would put its “very survival” in danger.

“You have the power to bring down the government, but you do not have the power to erase reality,” Bayrou informed lawmakers, including the present actuality in Europe’s second-largest economic system was that “the burden of debt — already unbearable — will grow heavier and more costly.”

What occurs subsequent is unsure. Whether new elections might be referred to as, as demanded by the far-right National Rally, or President Emmanuel Macron will handle to put in one other minority authorities, is the political aspect of the disaster.

Economically, it is about cash andFrance’s towering debt burden. In absolute phrases, no EU nation holds extra consolidated nationwide debt than France. Sovereign debt has climbed to round €3.35 trillion ($3.9 trillion) — about 113% of gross home product (GDP), with the determine anticipated to rise additional to 125% by 2030.

Europe’s debt king

France’s debt-to-GDP ratio is so excessive that throughout the European Uniononly Greece and Italy surpass it. With a price range deficit of 5.4% to five.8% this 12 months, Paris additionally runs the most important price range shortfall within the 27-nation EU.

To meet the EU’s goal of decreasing the deficit to three%, drastic financial savings are unavoidable.

However, since cuts are presently politically untenable, monetary markets have responded with increased threat premiums on French bonds. While German bonds carry an rate of interest of about 2.7%, the French authorities must pay shut to three.5% curiosity for its debt.

So ought to we fear concerning the stability of the one European foreign money, the euro, if the funds of the eurozone’s second-largest economic system slip uncontrolled?

“Yes, we should be worried. The eurozone is not stable at this point,” says Friedrich Heinemann, an economist with the ZEW Leibniz Center for European Economic Research in Mannheim, Germany, despite the fact that he’s “not concerned” a couple of new short-term debt disaster within the coming months.

“But we have to ask where this is heading if a big country like France, which has seen a steadily rising debt ratio in recent years, now also faces further political destabilization,” he informed DW.

Other main economies are additionally racking up traditionally excessive debt and should increase billions on capital markets. This fall, for instance, Germany, Japan, and the US might want to situation new authorities bonds to finance their spending — a key cause international bond markets stay underneath stress.

The solely cause the markets aren’t much more nervous — that means the spreads on French bonds aren’t rising additional — is the hope that the European Central Bank will step in and purchase French bonds to stabilize the market, Heinemann thinks. “But that hope could be misplaced, because the ECB has to be careful not to undermine its credibility.”

It’s been a long-standing political dilemma for successive French governments that each time they suggest austerity measures or financial reforms, events on each the left and proper cry foul and mobilize their supporters.

Unions have already referred to as a normal strike for September 10, two days after the boldness vote.

European Commission and ECB underneath stress

France now spends €67 billion yearly simply on curiosity funds. And it’s underneath stress as a result of it has dedicated to step by step decreasing its deficit in keeping with EU guidelines.

But Heinemann additionally lays a part of the blame on the steps of the European Commission as a result of it “helped create this mess.”

“It kept turning a blind eye, even both eyes, when it came to France. Those were political compromises driven by fear of strengthening populists,” he mentioned, including that “France has already used up much of its fiscal space. Germany is in a much better position, with plenty of room for maneuver.”

Stalled reforms

According to Heinemann, France, like Germany, urgently wants main welfare reforms and spending cuts. The various can be increased taxes in a rustic that already imposes heavy tax burdens on each residents and companies.

Therefore, Heinemann is skeptical that French politics can ship a cross-party consensus on debt discount. “With populists on both the left and right gaining ground, I don’t see that happening. The center is shrinking. That’s why I’m pessimistic about France and don’t see a solution.”

For Andrew Kenningham, chief European economist at London-based Capital Economics, the dangers to different European markets stay manageable for now.

“So far, the problems seem largely confined to France itself, as long as the scale of the French issue doesn’t grow too big,” he mentioned in a notice to purchasers.

But he warned of situations the place France’s disaster may escalate considerably, elevating the chance of contagion.

“After all, France is the eurozone’s second-largest economy, with deep trade and financial ties to its neighbors, and it is also a leading EU political power,” Kenningham famous, saying a disaster in France may due to this fact put the very viability of the European mission into query.

“We don’t expect a crisis of that magnitude in the next one to two years. But if it were to happen, contagion could become a much bigger risk — one the ECB would have to address,” he mentioned.

Bad timing for a political disaster

France’s turmoil comes at a time when the EU is locked in battle with the United States over commerce coverage, together with increased taxes on US tech giants proposed by France.

It’s poor timing for the EU to seem weakened by the political impasse in its second-largest economic system.

For Heinemann, many political actors in France are “Trumpists at heart,” particularly on the left and proper of the political spectrum.

“They could increase pressure on the European Commission to retaliate against Trump’s tariffs with European tariffs,” the economist warned, which might “raise the risk of a real trade war” and worsen the nation’s debt disaster even additional.

This article was initially written in German. It was first revealed on September 5, and up to date on September 8 after the French prime minister misplaced a confidence vote in parliament.