France's debt crisis threatens to engulf the eurozone
France's deepening political and financial crises are raising alarm bells across the eurozone, with economists warning of a potential new debt crisis. The country's fiscal indiscipline, marked by a public deficit of 5.8% of GDP, well above the EU's 3% threshold, has pushed borrowing costs to their highest levels in years. The euro has also weakened, falling to 1.116 against the US dollar, its lowest point in about 18 months. Analysts are divided on whether this crisis will spread beyond France, but early signs suggest contagion may already be affecting other eurozone nations like Italy, Belgium, and Greece.
France's structural debt issues are severe, with public debt expected to hit 121.7% of GDP by 2027. The country's nominal debt stock reached €3.6 trillion, the highest since 1945, driven by COVID-19 and energy-related spending, as well as tax cuts. The debt-to-GDP ratio has repeatedly exceeded the 60% Maastricht criterion, signaling a structural debt trap where growth rates lag behind borrowing costs. This has led to rising interest payments, now the largest spending item in France's budget, surpassing even education funding.
Prime Minister Sebastien Lecornu's minority government has proposed a €54 billion austerity package to reduce the deficit to 5% by next year, but the plan has faced fierce resistance. Protests by firefighters, public sector workers, and students have erupted nationwide, with clashes between protesters and police resulting in hundreds of injuries. The opposition has also resisted the unpopular budget cuts, further deepening the political crisis as President Emmanuel Macron's term nears its end.
The economic turmoil has also impacted the euro, which fell below the psychological threshold of $1.12 this week. Rising inflation, driven by energy price hikes, has further eroded purchasing power, fueling public discontent. Investors are growing increasingly wary, as evidenced by the widening yield spread between French and German 10-year bonds, which hit a 33-year high. Analysts like Jim Reid of Deutsche Bank question whether this marks the beginning of a new euro debt crisis or if markets are overreacting to the turmoil.