France's Rising Debt Yields Spark Eurozone Crisis Fears

France, once seen as a safe sovereign borrower, is now facing rising bond yields that are fueling fears of another euro crisis. The country's 10-year borrowing costs hit 5% last week, the highest since 2002, while the premium investors demand to hold French bonds over German debt has surged to levels last seen during the 2011-2012 eurozone debt crisis. This spread widened from 0.55 percentage points in mid-September to 1.45 points by Monday morning, reflecting growing concerns over France's fiscal health.

The root of the problem lies in France's deteriorating fiscal position. The government's budget deficit is expected to reach 5.4% of GDP this year, far exceeding the EU's 3% limit. Structural issues such as an expensive pension system, rising defense spending, and the costs of the green transition have exacerbated the situation. Public debt reached €3.6 trillion in the second quarter of 2026, equivalent to 119% of GDP, up from 115.6% a year earlier. The war in Iran has further strained finances by pushing up energy costs and weighing on economic growth.

Investors are skeptical about the government's ability to implement necessary spending cuts and tax increases, especially with upcoming elections and a hung parliament complicating matters. Prime Minister Sébastien Lecornu's minority government proposed a draft 2027 budget aiming for a deficit of 5% of GDP, with €54 billion in spending reductions and additional revenue. However, analysts remain unconvinced, noting France's history of missing budget targets. The French Treasury plans to sell €340 billion of debt in 2027, up from this year, adding to the challenge of finding demand for bonds at higher yields.

The rising bond yields are not just a French problem; they are spreading to other heavily indebted European economies like Italy, Belgium, and Greece. This has put the European Central Bank in a difficult position, needing to balance inflation concerns with the risk of destabilizing financial markets. Experts warn that the deteriorating bond market could push the euro towards $1.10, reflecting broader concerns about debt sustainability across the eurozone.