France debt crisis spreads fear of new eurozone turmoil
France, once considered one of Europe's safest borrowers, is now facing a debt crisis as investors demand higher yields to finance its growing debt. The country's 10-year borrowing costs surged to 5% last week, the highest since 2002, while the premium over German debt reached levels last seen during the 2011-2012 eurozone crisis. The spread between French and German 10-year bonds widened from 0.55 percentage points in mid-September to 1.45 points, signaling rising concerns about France's fiscal health.
The crisis stems from France's deteriorating fiscal position, with a budget deficit expected to hit 5.4% of GDP this year, far exceeding the EU's 3% limit. Public debt reached €3.6 trillion in the second quarter of 2026, or 119% of GDP, up from 115.6% a year earlier. Structural challenges, including an expensive pension system, rising defense spending, and green transition costs, have worsened the situation. The war in Iran has further strained finances by increasing energy costs and slowing economic growth.
The French government presented a draft 2027 budget aiming to reduce the deficit to 5% of GDP through €54 billion in spending cuts and additional revenue. However, investors remain skeptical, especially with elections approaching. Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull, questioned whether voters would support fiscal austerity before elections. BNP Paribas economist Stéphane Colliac noted that France had missed budget targets in three of the four years between 2023 and 2026, and the required adjustments are growing.
The crisis is spreading to other European markets, with Italian and Greek bond yields also rising. The European Central Bank faces a dilemma: balancing inflation concerns with the need to prevent financial market instability. Some experts, like Robin J Brooks, former chief economist at the IIF, believe the ECB will intervene to cap yields, viewing sovereign debt defaults as an existential threat to the euro. Others warn that such intervention could weaken the ECB's credibility amid persistent inflation.