France’s fiscal turmoil raises fears of another eurozone debt crisis

Ha Hyun-ock

The author is an editorial writer at the JoongAng Ilbo.

“No one is really prepared for a eurozone debt crisis 2.0. If it happens, it could be significantly worse.”

Sonal Desai, global chief investment officer of Franklin Templeton Fixed Income, issued that warning on Wednesday as concerns mounted over France’s public finances. According to Bloomberg, she warned that a sell-off in French government bonds could develop into a crisis surpassing the eurozone turmoil that began in Greece. France’s size makes the potential consequences particularly serious.

“France is a 3 trillion ($3.36 trillion) euro economy with 3.6 trillion euros in debt,” Desai said, noting that its debt exceeds Greece’s by more than tenfold.

That day, yields on French 10-year government bonds briefly exceeded 5 percent for the first time since 2002. The spread over comparable German bonds, a benchmark of perceived sovereign risk, widened to 1.594 percentage points. It was the first time the gap had exceeded 1.5 points since January 2012, recalling the debt crises that engulfed Greece, Ireland, Portugal and Spain.

France has become the eurozone’s vulnerable link because of its deteriorating finances, although its debt ratio is not the region’s highest. Its budget deficit is projected to reach 5.4 percent of GDP this year, above the previous 5 percent forecast. Without spending restraint, it could widen to 6.5 percent next year.

Demographic aging and inflation are pushing welfare costs higher. According to the Korea Center for International Finance, French social security spending amounted to 23.7 percent of GDP in 2024, compared to the eurozone’s 20 percent. Without structural reforms, the social security deficit could rise from 22.1 billion euros last year to 23 billion euros next year.

Government debt is also climbing. Shinhan Securities estimates that France’s debt ratio rose from 115.7 percent of GDP in 2025 to 119.3 percent in 2026. Interest payments reached 64.7 billion euros in 2025, equivalent to 42 percent of the overall fiscal deficit, and are expected to climb to 79.2 billion euros this year. Weak growth and insufficient tax revenue are also expected to leave a primary deficit, excluding interest payments, of 2.8 percent of GDP.

Higher bond yields compound the problem. Debt issued during the low-interest-rate period following the pandemic must increasingly be repaid or refinanced at substantially higher rates. According to Meritz Securities, long-term bonds maturing in 2027 total 196.2 billion euros, up 15 percent from 169.8 billion euros this year. Maturities rise further to 249.7 billion euros in 2028 and 293.2 billion euros in 2029. Shinhan Securities puts the average issuance yield on medium- and long-term French bonds at 3.55 percent as of September.

Meanwhile, France’s capacity to service its debt is weakening. The Korea Center for International Finance says its labor productivity index fell from 135 percent in early 2020 to 112.7 percent in 2025. Corporate research and development investment stands at just 2.18 percent of GDP, below the Organisation for Economic Co-operation and Development average of 2.72 percent. Delayed technological adoption further constrains growth potential.

Reducing the deficit requires spending cuts. On Oct. 1, the government submitted a 2027 budget containing 54 billion euros in fiscal consolidation measures, intended to lower the deficit from 5.4 percent of GDP this year to 5 percent in 2027.

Passage remains uncertain. Parliament is divided among centrists supporting Prime Minister Sébastien Lecornu, the far-right National Rally associated with Marine Le Pen and a left-wing alliance led by Jean-Luc Mélenchon of France Unbowed. Both opposition blocs resist spending cuts.

The Wall Street Journal reported on Thursday that uncertainty surrounding budget negotiations and next year’s elections could discourage foreign investors from purchasing additional French bonds or prompt sales. Violent protests have heightened concerns that spending restraint will prove politically impossible. Foreign investors hold 58.4 percent of France’s long-term general government debt, leaving the market exposed to withdrawals.

Moody’s decision on Friday to maintain France’s Aa3 sovereign rating provided temporary relief. But its warning that insufficient deficit-reduction efforts could trigger a downgrade left investors uneasy.

European Central Bank intervention is far from assured. Although the bank could deploy its Transmission Protection Instrument to purchase bonds if turmoil spread across the eurozone, markets believe the conditions for intervention are demanding.

The dilemma is increasingly difficult to resolve: higher borrowing costs swell interest payments, while political resistance prevents expenditure cuts. Without credible agreement on the budget, investors may demand still greater premiums, reinforcing the pressure on already strained public finances.

Samsung Securities recently assessed the risk of contagion to other countries’ financial systems as limited, while warning that French bond-market instability would persist until confidence in fiscal sustainability returned.

Lee Seung-hoon, an economist at Meritz Securities, emphasized two priorities drawn from previous debt crises: smooth passage of France’s 2027 budget and an unequivocal commitment by presidential contenders to restoring fiscal discipline.