Many of Europe’s largest economies have a debt problem, but the ramifications for the UK and France have a greater sense of urgency.
It’s clear for both countries that failures to get a grip on their public finances are being punished by the bond markets at a time when economic growth is hard to come by in a world squeezed by war and tariffs.
Yields, which reflect the level of risk investors demand to hold a country’s debt, are on the rise across most Western economies but the UK and France are seeing the biggest leaps and the upwards trajectories are diverging from those of their peers.
The consequences are clear: rising costs of servicing bonds for governments only result in less cash to spend elsewhere and hinder efforts to balance the books.
While we know much about the market’s jitters over the state of the UK’s finances ahead of the autumn budget, we should cast a spotlight across the Channel now because the flashpoint could come as early as next week.
What’s the issue?
France is a country with a long-standing overspending problem – and no apparent political ability to rein it in.
While the cost of servicing its debts is not quite as bad as the yields the bond market is imposing on the UK, a renewed political crisis is seen as having more widespread ramifications.
It risks not only a return of social unrest (remember the ‘gilets jaunes’ (yellow vests) protests of 2018 and subsequent violence over pension reforms and prices?) but economic turmoil too.
Confidence vote looms
The current French prime minister, who is planning to impose a €44bn (£38.1bn) budget cut that includes a widespread spending freeze and the scrapping of two public holidays, looks to be heading for the exit.
Opposition groups in parliament are refusing to back Francois Bayrou in a confidence vote that he called for his minority government this coming Monday.
If he’s forced out, President Emmanuel Macron is likely to respond by trying to replace him, having refused to call new parliamentary elections ahead of his own second term concluding in 2027.
Polls suggest the public want snap elections and show a resurgence of anger over the impasse – a repeat of the row which forced out Michel Barnier as French PM late last year.
The opposition parties agree that France’s total debt and budget deficit are too high but disagree on how they should be trimmed and who should foot the bill.
The elephant(s) in the room
The numbers are pretty staggering.
French gross national debt stood at €3.35trn (£2.9trn) at the end of the last financial year to March.
That represents almost 114% of its gross domestic product (GDP) on an annual basis. At the same time – to give the best comparison – the UK’s also stood at £2.9trn, but that was 96.3% of GDP.
The French debt to GDP figure represents a record high for the nation and has been rising steadily for more than 20 years.
The budget deficit currently stands at 5.8% – that is almost double the 3% allowed by the European Union.
The Bayrou government’s plans aim to trim that figure to 4.6% in 2026.
That budget will be dead and buried, in all likelihood, if the government falls.
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UK long-term borrowing costs at 27-year high
No room for Treasury complacency in toxic market shift
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What could happen next?
We saw an extraordinary intervention by the French finance minister Eric Lombard last week – remarks that were quickly corrected – which set the tone for the scale of the task ahead.
He raised the spectre of France potentially needing to seek help from the International Monetary Fund (IMF) if the government could not put its finances in order.
All the recent commentary has been more reassuring, but it failed to prevent the yield on the country’s 30-year bonds hit its highest level in more than 16 years on Tuesday.
There is a risk that bond markets lose faith completely if political compromise fails to materialise.
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Will that really happen?
The growing sense of crisis is already being priced in, as shown in the current bond sell-off, but we are still a fair way off from a collapse in investor confidence.
Intervention by the European Central Bank, through a loan, would be more likely than IMF aid in the event yields rise substantially and France is unable to pay its way.
Analysts at Nomura said in a research note: “Due to the expected fall of Bayrou’s government and the likelihood that parliament will not pass a 2026 budget this year, the 2025 budget will likely be frozen in nominal terms, which would mean a marginally higher deficit in 2026 as a percentage of GDP than forecast by the European Commission.”
The problem for France in trimming its deficit is that no-one is willing to accept worse terms.
With unions and protest groups planning a campaign of national action from 10 September, the social, political and economic challenges in France are looking insurmountable in the short term.
