HIKMA SUMMIT
OF INTERNATIONAL RELATIONS

Back in my days…

France last balanced its budget in 1973, and maintained a generous welfare state with strong worker protections. That worked for years when solid economic growth was sweeping tax revenue into government coffers.

Accumulated debt was high — over 90% of annual gross domestic product from 2008 on — but manageable due to steady growth and years of near-zero interest rates. Then came the pandemic, followed by an energy crisis after Russia cut off most natural gas supplies following its 2022 invasion of Ukraine.  The French government spent heavily on subsidies to keep businesses afloat and shield people from higher energy costs. There’s also to note that globally, interest rates suddenly moved higher. Debt in France jumped: from 98% of GDP in 2019 to 114% currently. The annual deficit last year ballooned beyond forecasts to 5.8%.

In the meantime, the beginning of the financial crisis was coupled by the major repercussions of French president Macron’s decision to dissolve the national assembly, on 9 June 2024. Since then, political instability has been sweeping through the country and Elysee’s cabinets of ministers.

As such, at the start of 2025, France operated without a budget for a month and a half, thanks to a minimalist "special law" that renewed the previous year's credits. That exceptional scenario, which the country had not experienced in 45 years, is looking increasingly likely to recur. As illustrated by, the crisis triggered by Prime Minister Sébastien Lecornu's resignation on October 6, just a week before the expected presentation of the draft 2026 budget bill, jeopardized the adoption of a budget within the constitutionally set timeframe.

Who pays for the broken pots ?

France is on its fifth prime minister, since the assembly dissolution resulted in a hung parliament. The economic uncertainty that accompanies parliamentary gridlock  manifests in the form of higher yields.

To note that, additional interest borne by the French taxpayer over the lifecycle of issued debt attributable to the political turmoil is estimated to be €6-7.5bn. This instability penalty is thus far roughly equivalent to France’s annual expenditure on its Personalised Housing Assistance (APL) programme for low –  and middle-income households – a cornerstone of the French welfare state. Once again, the poor pay what the rich broke.

To try and balance the respective expectations of the financial guideline of the EU and the corporation’s needs that Emmanuel so deeply cherishes, Macron decided to cut deep in the welfare state ; once more. This not only destabilizes the cohesive appearance of France on the market, but also discredits France as a powerful country… incapable of protecting itself even against petty thieves. As such, the Louvre’s cambriolage is the testimony of a welfare state, a culture that is left to bleed, not financed nor looked at.  Ironic it is, because not only the national turmoil is disdained by Macron himself  –  in discourses where he accuses the opposition to be at the origin of these turbulences –  but the impact of these domestic affairs on the global market seems of little importance too.

The current situation

If we look thoughtfully, while the second premiership of Sébastien Lecornu has stabilized markets, the yield on 10-year French government debt, a benchmark indicator of the market’s perception of fiscal risk, remains far above its long-term average. Extreme short-term political risk may have abated, but long-term fiscal concerns persist. The one-notch downgrade by S&P’s on 17 October will reinforce, rather than settle, market unease.

From the perspective of a bond investor, France is becoming an increasingly problematic credit risk. At the end of Q1 2025, France’s debt-to-gross domestic product ratio stood at 114.1%, the third highest in the euro area, beaten only by Greece (152.5%) and Italy (137.9%).

In European debt markets, the key indicator of fiscal risk is the spread between the yield on a country’s 10-year bonds and the yield on the equivalent German Bund. Bunds are the safe reference asset of the euro area – the yardstick against which all other assets may be compared. An increase in the spread between the yield on French 10-year bonds (OATs) and German 10-year Bunds, all else equal, implies deteriorating conditions in the French economy.

Between the beginning of the European Central Bank’s post-pandemic rate hiking cycle on 27 July 2022, and the date of France’s snap parliamentary election on 9 June 2024, the average spread between 10-year OATs and Bunds was 53 basis points – in line with the post-euro area crisis average. Between the election and 16 October 2025, this spread averaged 74 basis points. The 21-basis point difference is the extra yield demanded by bond investors as compensation for political instability.

Approximately 25% of French bonds are held by foreign non-banking financial institutions (NBFI) ;  the investor subsection most sensitive to negative news and rising uncertainty. This investor base increases the elasticity of the French 10-year yield with respect to French political dysfunction, with foreign NBFIs driving the transmission mechanism through which domestic political gridlock translates into higher borrowing costs for the French state.

France as the new Greece… ?

However, officials in Brussels are unlikely to want to appear to be interfering in domestic political affairs, yet the pressure is on for Paris to embark on some serious fiscal consolidation  ; and fast.

France needs to close the budget deficit  and address the significant debt pile. Currently, France is behind only Greece and Italy in terms of the European Union’s largest debt piles. Both levels are far above EU rules demanding that individual members’ deficits should not exceed 3% of GDP, while their public debt should not surpass 60% of economic output.

France is Europe’s biggest spender relative to its economic output. When measured by budget deficit – the gap between government spending and revenue – France is also among the most spendthrift in the European Union, according to Eurostat, the bloc’s statistics office. Consequently, France has been placed under the EU’s “excessive deficit procedure,” applied to member states that are not meeting the rules set out in the “Stability and Growth Pact”.

Futur prospects (?)

Squeezed between internal and external pressures, France realized that it has to act quickly. De facto, the budget review at first reading in the National Assembly takes place until November 4, 2025. Yet, the government of Sébastien Lecornu will have to find compromises to pass his text, while knowing that the blockage could lead to the adoption of the budget by ordinances, a constitutional procedure never used to date.

Indeed, France stands at a critical crossroads, where political instability and economic challenges converge to test the nation's resilience. The current crisis is more than a temporary setback ; it’s a fundamental challenge to France's traditional role as a European economic powerhouse.

One might say, in a pessimist tone, that the decline of France represents the future decline of the EU. After all, there’s a general misconduct in our economies…. France might seriously struggle to pass an effective and realistically feasible budget before the end of this year ; nonetheless the “wanting to be reassuring" discourses held by Prime Minister Lecornu.

In fact, outside observer like S&P, predicts a deficit of 5.3% of GDP in 2026, while Fitch bets on... an increase in the latter to "5.5%-5.6%".Clearly, France has lost all budgetary credibility with the markets, international investors and, above all, its European partners. The promise made to Brussels to return to a 3% deficit by 2029 is not worth more than the paper used to print it.

In the end, not only France will have to  address the market's discontent, but the combination of mounting public debt, political gridlock, and market skepticism threatens to undermine decades of social achievements. At least, if you were to enquire about this to Macron, he would tell you, “let them eat debt”.