France's $4 Trillion Debt Hits Post-WWII High Ahead of Budget Vote

By Daniel Okafor

France's public debt has reached a record $4 trillion, or 119% of GDP — the highest ratio since the immediate aftermath of World War II. The figure lands days before a critical budget vote in the National Assembly on Tuesday, and it frames the country's deepest fiscal test in a generation.

Nationwide protests over the cost of living roiled French cities on Saturday. Rioting broke out in some places. Looters hit luxury boutiques and supermarkets, and protesters set public buildings on fire. Earlier this month, students had marched over run-down classrooms, missing teachers and buildings unequipped for rising temperatures.

The markets have already rendered a verdict. French bond yields now sit at their highest levels in 24 years, flashing warning signs not seen since the eurozone debt crisis of 2011.

What does Tuesday's vote decide?

Prime Minister Sébastien Lecornu — the latest in a revolving door of premiers — has proposed a 2027 budget that would trim the deficit to 5% of GDP from 5.4%. The National Assembly takes its first critical vote on the plan Tuesday.

Mujtaba Rahman, managing director for Europe at Eurasia Group, sees the stakes in blunt terms. "If his government fails to pass the budget, the cost of servicing French debt may explode," he wrote in a New York Times op-ed on Thursday. "France could be forced to seek assistance from the International Monetary Fund and to pray for it from the European Central Bank — a humiliation for the world's seventh-biggest economy."

Rahman diagnosed three overlapping crises: liberal democracy, fiscal mismanagement, and youth disaffection. "But the fiscal crisis is the most dangerous, underlying many of the country's woes and threatening to bring it to ruin," he wrote. "France, truly, is on the brink."

Why is debt squeezing schools and streets?

The mechanism is generational. France's education spending tops the European Union average, yet more than a quarter of that money pays pensions for retired teachers, Rahman noted.

Nobel laureate Paul Krugman drew the same line in a Substack post last week. France's very generous government pension plan has crowded out education spending, he argued, meaning the state effectively subsidizes older French citizens at the expense of everyone else.

The pandemic, the Ukraine war and the Iran war worsened the fiscal picture. President Emmanuel Macron has also pulled back from reforms meant to rein in the debt.

Why do markets distrust the candidates?

The problem is political more than economic. Far-right and far-left candidates lead the race for the spring presidency, and markets doubt either side would take painful steps on the deficit.

Far-right leader Marine Le Pen has vowed to roll the official retirement age back to 62, and previously suggested dropping it as low as 60. Far-left candidate Jean-Luc Mélenchon campaigns on a plan to have the central bank simply cancel its holdings of French debt.

"The country, they fear, is becoming socially volatile and institutionally paralyzed," Rahman said of bond investors. The presidential election in May may not even be decisive: a legislative election in June could deny the new president a parliamentary majority and extend gridlock.

One narrow escape route exists. If Le Pen orders her Assembly allies to abstain, the budget could pass. "That may avert, for now, the kind of meltdown suffered by Greece after the financial crash. But France is no longer in control of its destiny," Rahman warned.

How bad could the bond market reaction get?

The bond market has already started pricing in growing odds of a French debt default. An explosion in borrowing costs would signal France sits at the market's mercy — similar to how the United Kingdom has fallen effectively in thrall to so-called bond vigilantes.

Thierry Wizman, global FX and rates strategist at Macquarie Group, argued in a Tuesday note that France would need a series of convulsions before it gets its act together. His list:

• A no-confidence vote leaving France ungovernable from the Assembly
• A Moody's credit downgrade
• Wider street protests and violence
• A sharper, contagious spike in France's bond yield spread
• The election of Le Pen as president

The European Central Bank would not rescue France quickly for fear of encouraging "moral hazard," Wizman argued. Other bailout mechanisms lack the firepower for an economy of France's size.

"Either way, it would seem that one would have to go through the valley before getting to the other side of the fiscal responsibility gap," he wrote. "And only after all that transformational pain of the next few months may France find its spine and commit to austerity."