Die Strassenschlachten in Frankreich befeuern die Ängste an den Finanzmärkten vor einer Eskalation der Krise

French investors are currently more cautious than those from Italy or Greece due to rising tensions in the country. French government bond yields are at their highest point since 2002, reflecting the high risks associated with investing in French debt compared to Italian and Greek bonds. The images of civil unrest spreading across French cities have dominated global news coverage, reflecting the economic malaise of the nation.

Political turmoil reflected in these uprisings has contributed to the economic woes of France. Consequently, concerns are growing in financial markets that France is becoming a crisis hotspot in Europe, potentially dragging down other Eurozone countries. Record-high yields on French bonds signal that international investors demand higher returns for the risk of purchasing more French government bonds.

The risk premium for French bonds is now over 1.5 percentage points, the highest since the European sovereign debt crisis. Compared to German bonds, which are considered particularly safe, the risk premiums for French bonds have surged to over 1.5 percentage points, the highest level since the European sovereign debt crisis. With a staggering national debt of 3.6 trillion euros, the increase in yields for French bonds is particularly burdensome as it makes borrowing more expensive and further inflates the debt.

This development is already weighing on the euro, as the currency has depreciated by nearly 4 percent against the dollar and more than 3 percent against the Swiss franc in recent weeks. The combination of high national debt, an oversized budget deficit exceeding 5 percent, and weak growth, coupled with political instability, has turned France into the worry of the Eurozone.

The country's debt-to-GDP ratio has risen from 98 percent in 2019 to nearly 120 percent of the current GDP, according to the Dutch ING bank's economists. They predict that the ratio will reach 122 percent next year. This situation is worsening both absolutely and relatively, as it moves further away from Germany's debt-to-GDP ratio of 64 percent by the end of 2025 and approaches Italy's 137 percent.

France has a notorious history of budget deficits and excessive national debt. In the past 200 years, it has rarely managed to achieve a budget surplus. Since 1974, governments have consistently run budget deficits, marking one of the longest streaks globally. The Maastricht criteria of a budget deficit not exceeding 3 percent and a debt-to-GDP ratio not exceeding 60 percent - which were meant to ensure the stability of the monetary union - have rarely been met by France since the Euro's inception.

While France is far from being a second Greece, its economic indicators are deteriorating rapidly. However, many observers expect the European Central Bank (ECB) to intervene in an emergency and purchase French government bonds. However, this will only happen if the French government tries to address its financial problems and reduce the budget deficit.

To bring the deficit down to the still high level of 5 percent in 2027, the government would need to make cuts of around 43 billion euros. With the presidential elections in April and the ongoing violent disturbances, primarily by leftist extremists and migrants from the Banlieues, the opposition in parliament has little incentive to help the minority government of Prime Minister Sébastien Lecornu.

While the government could bypass parliament, doing so could trigger a vote of no confidence and the collapse of the government, as has happened twice since 2024. This would further delay the adoption of a 2027 budget and further unsettle financial markets.