France’s debt crisis sparks fears of new eurozone turmoil

France, once considered one of Europe’s safest borrowers, is now facing a growing debt crisis as investors demand higher yields to finance its mounting debt. The country’s 10-year borrowing costs surged to 5% last week, the highest level since 2002, while the premium over German bonds climbed to its highest since the 2011-2012 eurozone debt crisis. The spread between French and German 10-year bonds widened from 0.55 percentage points in mid-September to 1.45 points, reflecting rising investor concerns.

The selloff in French bonds has begun affecting other markets, with the euro hitting a 17-month low against the dollar. Borrowing costs in Italy, Belgium, and Greece have also risen, signaling broader eurozone risks. France’s fiscal position is deteriorating, with a budget deficit expected to reach 5.4% of GDP this year, far above the EU’s 3% limit. Public debt hit €3.6 trillion in the second quarter of 2026, or 119% of GDP, up from 115.6% a year earlier.

Efforts to stabilize the situation include a draft 2027 budget proposing €54 billion in spending cuts and additional revenue, targeting a deficit of 5% of GDP. However, investors remain skeptical, especially with elections approaching. Erik Bregar of Silver Gold Bull questioned the market’s acceptance of the budget, while BNP Paribas economist Stéphane Colliac noted France’s history of missing budget targets. The French Treasury plans to sell €340 billion in debt in 2027, adding to the strain.

The European Central Bank faces a dilemma: balancing inflation concerns with the need to prevent a financial crisis. Some experts suggest pausing quantitative tightening to ease bond market pressure, though this risks undermining the ECB’s credibility. Jean-Luc Mélenchon, a far-left presidential candidate, has called for the ECB to freeze part of government debt. The situation highlights the fragility of eurozone finances and the potential for broader contagion.