“France's sovereign financing costs within the European Union have continued to deteriorate. During the great crisis in Europe, the countries with the greatest financial stress—Portugal, Italy, Greece and Spain—were labeled with the infamous acronym 'PIGS'. Today, these countries' 10-year financing costs are below those of France.” With this report from Muzinich&Co analysts they show how the political crisis that has France overwhelmed also has a complicated economic derivative that is increasingly worrying the member countries of the European Union, since it is the second largest economy in the EU and there is fear of systemic contagion due to its debt problems.
The French Prime Minister, Sébastien Lecornu, launched a roadmap at the beginning of his mandate in which he announced the suspension of the controversial pension reform “until the presidential elections”, scheduled for 2027. This resignation allowed him to resolve two motions of censure presented by Insoumise France (LFI) and by the National Rally (RN), Marine Le Pen's party, thanks to the fact that the socialists They stood out from the rest of the left to save Emmanuel Macron's prime minister.
However, overturning the pension reform will cost 2.2 billion euros in total over the next two years, according to Bloomberg, which will add more pressure to a country that analysts have put under surveillance for its excessive debt.
Lecornu presented a budget for 2026 with the aim of reducing the public deficit to 4.7% next year, compared to 5.4% in 2025, and returning to below 3% in 2029. France is one of nine EU Member States subject to an excessive deficit procedure. The French Government's objective is to “start a debt reduction from 2028”, although the debt is expected to reach 115.9% of GDP at the end of 2025 (+2.7 points compared to 2024). It is the third most indebted Member State in the EU, behind Greece and Italy, and the fifth country in which debt has increased the most (+3.5 points) in the first quarter of 2025. France now pays 67 billion euros annually in interest payments on its debt alone.
The problem for the French Government is that there is little confidence that the proposed measures will be enough to reduce the debt. Ulrike Kastens, European economist at DWS, explains that “France appears to be on track to have the largest budget deficit of any member of the euro zone, regardless of the political and parliamentary maneuvers that may occur in the coming days and weeks.”
What is happening to France's economy?
Philippe Waechter, chief economist at Ostrum (Natixis) explains that “the French economy is in crisis because it lacks the resources that would allow it to converge towards growth without imbalances in the medium term.” The forecasts are that France will grow between 0.6% and 0.8% in 2025.
The imbalances in the French economy “are evident,” in the opinion of Ostrum's chief economist. On the one hand, “the profile of potential GDP is too limited to be able to eliminate the public deficit in the long term. In the medium-term projections of Bercy (French Ministry of Economy), the deficit remains at 3%, which is not natural”, while on the other hand, “the public debt has been increasing almost continuously since its lowest point in 1975. This reflects the mismatch between the needs of the social model and the capacity of the economy to produce a sufficient level of income”.
“The proposed solutions are insufficient to imagine that they are sustainable. Raising taxes is not a good idea, even if there are questions of fiscal justice. Resorting to debt to reactivate the economy and imagining that this will be enough to reverse the trend could be laughable, given the failures of previous experiments. This configuration, without any real solution, is not sustainable in the long term,” argues Waechter to explain the impasse where France has gotten involved with its political and economic crisis. “The situation in France worries European partners,” concludes the chief economist of Ostrum.
In France, there are already low expectations of a short-term solution. Clément Inbona, fund manager at LFDE, adds that “in the September figures published by INSEE, business confidence was already approaching its lowest level since the end of the COVID crisis. As for households, their savings rate is already the highest since the 1970s (not counting the pandemic period), a sign that their confidence in the future is already shaken.”
And when France gets sick, the rest of the continent suffers. “The political situation in France is a burden, not only for the country itself, but for the European Union as a whole. Our eurozone growth forecast for 2026 is a moderate 1.1%. In Europe, a further increase in geopolitical instability and fiscal risks – with France as the key – could deteriorate long-term sentiment and the investment climate,” says Vincenzo Vedda, Investment Director at DWS.
Credit rating downgrades
The problem is that distrust could grow in the coming weeks. “On the table is still the possibility that Moody's or S&P will lower France's credit rating between now and the end of the year, which would make France go from the AA to A category in the eyes of international investors,” recalls Xavier Chapard, strategist at LBP AM. Fitch has already downgraded France's long-term credit rating to A+ from AA- on the grounds that “debt will continue to rise, reflecting persistent primary fiscal deficits, with no clear horizon for debt stabilization.”
“If France suffers further reductions, the demand for French Treasury bonds (known as OAT) by foreign central banks will be reduced,” says a UniCredit report, with the harsh consequences that it could have for the financing of France's public accounts.
France is the largest issuer of public debt in Europe with nearly 3 trillion euros in circulation. “Political tensions in France have caused a rise in bond spreads. The pressure has so far been limited to France and leaves the general convergence of sovereign spreads intact. Investors have interpreted this episode as a country-specific problem, but the situation requires close monitoring in the coming months because an escalation could have broader implications for the euro zone,” they add in the Unicredit report.
Even if France loses its double A status in credit ratings, it will still remain within the investment threshold. The problem is that there are large investment firms such as BlackRock, Vanguard or Legal & General that have investment products that only operate with products with a double A rating or higher. If France loses this rating, it could cause an exit of investors that would lead to a worsening of the crisis, according to Bloomberg.
Despite the risks of systemic contagion or precisely because of it, the president of the European Central Bank (ECB), Christine Lagarde, has tiptoed through the implications of the French crisis. Last Tuesday, Lagarde said she “saw no signs of disorder” in the euro zone bond market despite the ongoing budget crisis in France. “I already said before that we are monitoring the financial markets, that we are watching the spreads…, but there is nothing disordered at the moment.” Now, he also made it clear that if there are problems “there are tools” to respond.
“We should be worried. The eurozone is not stable at the moment. The only reason the markets are not even more nervous is because of the hope that the ECB will intervene and buy French bonds to stabilize the market. But that hope could be ill-founded, because the ECB has to be careful not to undermine its credibility,” warns Friedrich Heinemann, an economist at the Leibniz Center for European Economic Research. (ZEW), in statements collected by the DW agency.