France, long considered one of Europe's most reliable sovereign borrowers, is now facing a sharp reassessment by investors. The country's 10-year borrowing costs climbed to 5% last week, the highest level since July 2002, while the premium over German bunds widened to levels not seen since the eurozone debt crisis of 2011-2012.
The spread between French and German 10-year yields has ballooned from 0.55 percentage points in mid-September to 1.45 points by Monday morning. This widening reflects growing unease about France's fiscal trajectory, which has deteriorated significantly in recent years.
At the heart of the problem is a persistent budget deficit. France's deficit is projected to reach 5.4% of GDP this year, well above the European Union's 3% limit. The country has not balanced its budget in over three decades and has missed EU deficit targets since 2019. Structural pressures, including an expensive pension system, rising defense spending, and the costs of the green transition, have compounded the challenge.
French public debt reached €3.6 trillion in the second quarter of 2026, equivalent to 119% of GDP, according to INSEE, the national statistics agency. That is up from 115.6% a year earlier. The war in Iran has added further strain by pushing up energy costs and weighing on economic growth.
Investor concerns are not just about the size of the debt but also about the political capacity to address it. With a presidential election approaching and a hung parliament, implementing spending cuts and tax increases has become politically fraught. Marine Le Pen's far-right National Rally party is gaining ground, making fiscal consolidation even more difficult.
Prime Minister Sébastien Lecornu's minority government presented its draft 2027 budget last Thursday, aiming to reassure markets. The plan includes roughly €54 billion in spending reductions and additional revenue, targeting a deficit of 5% of GDP next year, down from 5.4% in 2026. About two-thirds of the adjustment would come from spending restraint, with the rest from higher taxes and contributions.
However, investors remain skeptical. "It just seems to me like the market is rejecting this 2027 budget. There's an election coming up ... who's going to vote for fiscal austerity with elections coming up?" said Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull in Toronto, in a Reuters report. Stéphane Colliac, an economist at BNP Paribas, noted that France had already missed its budget targets in three of the four years between 2023 and 2026.
The scale of adjustment needed is growing. With interest payments and defense spending both increasing, Colliac estimates that the government needs to find savings equivalent to about 1% of GDP simply to reduce the deficit by 0.4 percentage points. France's fiscal challenge is compounded by the amount of debt it must issue. The French Treasury plans to sell €340 billion of debt in 2027, €20 billion more than this year, as pandemic-era borrowing comes due.
Even if the government's plans are fully implemented, Colliac expects French debt to rise to 121% of GDP in 2027 and eventually stabilize at around 124% in 2032. Higher yields mean the government must devote an increasing share of its budget to interest payments, leaving less room for public investment. Interest payments are expected to rise from €79.2 billion in 2026 to €91.2 billion in 2027 under the government's budget projections.
The dynamic can become self-reinforcing: larger debt increases borrowing costs, higher borrowing costs increase interest payments, and higher interest payments make it harder to bring down the deficit. For now, France remains the biggest source of concern, but markets are increasingly signaling that the problem may not remain confined to Paris. Italian and Greek spreads over German Bunds widened by almost 15 basis points during the recent French turmoil, according to ING strategists Michiel Tukker and Benjamin Schroeder. "Debt dynamics are no longer deemed only a French problem," they wrote.
This article is for informational purposes only and does not constitute financial advice.
