Nobel laureate economist Paul Krugman has raised concerns that France may have become 'too big to save' due to its growing debt crisis. In a Substack blog post, Krugman argued that France is on an unsustainable fiscal path, with rising interest payments on government debt and large budget deficits worsening its high debt-to-GDP ratio. He highlighted the country's failure to address its relatively low retirement age amid an aging population as a key issue. Krugman warned that France's reliance on the euro could lead to a loss of investor confidence, triggering a vicious cycle of capital flight and higher interest rates, similar to the Sovereign Debt Crisis that struck southern European nations a decade ago.
Krugman noted that the European Central Bank's (ECB) 2012 pledge to do 'whatever it takes' to prevent national defaults was accepted partly because countries like Greece, Portugal, Spain, and Italy implemented severe austerity measures. He suggested that bailing out France would be extremely expensive for the ECB and politically divisive, especially as the country moves further away from fiscal responsibility. 'France may have crossed the line from too big to fail to too big to save,' he wrote, painting a grim picture of a potential French crisis that could deeply divide Europe.
Former ECB chief Jean-Claude Trichet urged French politicians to find a compromise to reduce the country's deficit, emphasizing that the responsibility lies with the French government and parliament. Speaking to CNBC, Trichet acknowledged the availability of instruments like the European Stability Mechanism and the ECB's Transmission Protection Instrument (TPI) but stressed that France would need to request help, which it currently claims is unnecessary. He called on all political factions in France to prove they are responsible and deliver credible solutions to stabilize the economy.
Trichet, who led the ECB from 2004 to 2011, emphasized the importance of France convincing market participants of its credibility. He recalled his own experience during the Sovereign Debt Crisis, stating that countries must first help themselves before seeking external assistance. 'You first have to help yourself, because we cannot win if you are not yourself convincing market participants, investors, and savers that you are credible,' he said, underscoring the need for France to demonstrate a commitment to fiscal responsibility.