France will need a comprehensive overhaul of public finance under whichever president the country elects to succeed Emmanuel Macron next year. Otherwise, it will be drawn into a negative spiral of progressively higher interest costs and slower growth. This could significantly constrain the state’s ability to take on new debt and trigger a financial crisis within economic and monetary union.
Some bond market investors appear to consider that French public finances will somehow benefit from largesse via a bail-out from the European Central Bank. Otherwise, it is difficult to understand why yields on French 10-year bonds are trading at only 0.8 percentage points over German government bonds. This ‘spread’ is up from a range largely below 0.5 points in the decade to 2024. But it compares favourably with a yield spread of 1.8 points for the UK, whose public finances, although far from healthy, are in a less poor state than France’s.
‘Sick land of Europe’
It is an illusion for France to believe it will somehow be kept afloat by the ECB or by German benevolence. France cannot rely on charity from others, nor should it ask for any. One of the reasons for the breakdown in Franco-German co-operation over building a new generation of fighter aircraft is because Germany is no longer willing to subside France in joint industrial projects. The reality is that French public finances are in a catastrophic state − with repercussions for next April’s presidential elections marking the end of Macron’s second five-year term. France’s general indifference to its public spending malaise makes it ‘the sick land of Europe’.
The budget deficit of 5.1% of gross domestic product last year is expected to rise slightly this year, remaining well above the Maastricht reference level of 3%. France’s general government debt as a percentage of GDP has risen to close to 120% from just under 100% in 2019 and 60% in 2000, the last time it was at the Maastricht level.
Public spending has been rising for 25 years, now at 57% of GDP, 8 percentage points above the European average, epitomised by the bloated number of public employees, up by 1m since 1997. Over this period public sector staff numbers have risen 23% alongside a population rise of 15%.
The primary deficit (excluding interest charges) of 2.9% of GDP is the highest in the euro area. Interest costs of 2.2% of GDP in 2025 (€65bn) are France’s biggest public spending item.
Debt and defence
The economy is under pressure because of general uncertainty over US tariff measures as well as extreme heatwaves and disastrous wildfires. There is no perspective that the deficit will be reduced. The French experience compares with stabilisation of the debt in Italy and a sharp decline in the last 10 years in Germany − even though German debt is expected to rise significantly in coming years as a result of higher defence spending driven by the war in Ukraine and the US request for Europe’s Nato members to shoulder more defence burdens.
Europe has been undermined by two wars, in Ukraine and now, since the end of February, between the US, Israel and Iran. We see the effects in the shift in trade in energy with Russia, the diversion of Chinese exports away from the US to Europe, and America’s benefits under President Donald Trump from its position as a net oil exporter.
Add to that the power of the dollar and the overall effect of mistaken ECB monetary policy including a far too easy stance when the ECB was combatting alleged deflation 10 years ago.
Entry into the euro and the ECB’s loose policies have undermined the state’s ability to maintain financial equilibrium. Far too many people believed that EMU was a panacea for Europe’s ills. As long ago as 1975 I warned − as director of the French Treasury − that the mooted creation of a European currency would in no way eradicate imbalances between member states.
The European Commission’s stewardship of the euro area is a fiasco. It has abandoned any pretence of maintaining discipline through fiscal orthodoxy.
On present trends, France’s position will deteriorate. Assuming annual economic growth of no more than 0.7% to 1% relative to 10 years of interest rates at around 4% in August 2026, the ‘snowball effect’ of rising public debt-to-GDP could soon render the budgetary position untenable, leading to rising bond market spreads and economic stagnation.
What can be done?
A minimum effort is needed to reduce the primary deficit from 2.9% of GDP to a ‘stabilising’ level of 0.1% – requiring a fiscal adjustment of 3% of GDP. This effort needs to be achieved over several years and is possible without changing the fundamental component of the French social system. Maintaining the public debt at the current figure of €3.5tn would require a still greater adjustment.
I would favour carrying out this latter ambition over five to seven years, cutting the primary deficit by €30bn a year. This would produce a primary surplus of €30bn in 2030 compared with a primary deficit of €88bn in 2025. Public debt would be 121.8% of GDP in 2029, falling to 108.2% in 2035 if the adjustment was maintained for 10 years. If, on the other hand, the primary deficit stayed at the current level, public debt would rise to 131.5% of GDP in 2029.
The problem cannot be resolved in its fundamental aspects by mere support from the ECB. If the ECB were to indulge in buying the public debt that cannot be absorbed by markets anymore, this would not change the basic structural weaknesses that lie at the heart of France’s adjustment problems. The worse of all scenarios would be to see the ECB throwing unconditional money at problems that require reforms more than financing. Such a scenario would lead to more inflation and less growth.
Jacques de Larosière is a former director of the French Treasury, managing director of the International Monetary Fund, governor of the Banque de France and president of the European Bank for Reconstruction and Development.
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