France Faces Critical Budget Vote as Debt Crisis and Protests Escalate
France is days away from a make-or-break vote on its 2027 budget as nationwide protests over the cost of living turn into riots, bond yields hit 24-year highs, and analysts warn the country is on the brink of a debt crisis.
France is heading into a decisive week as its National Assembly prepares to vote on a 2027 budget that analysts say could determine whether the country avoids a full-blown debt crisis. Nationwide protests over the high cost of living turned into riots in several cities over the weekend, with luxury boutiques and supermarkets looted and public buildings defaced or set on fire. The unrest adds to mounting pressure on a government already struggling to convince financial markets it can bring its deficit under control.
The budget proposed by Prime Minister Sébastien Lecornu would reduce the deficit modestly, from 5.4% of GDP to 5%, and faces its first critical vote on Tuesday. Mujtaba Rahman, managing director for Europe at Eurasia Group, warned that if the government fails to pass the budget, the cost of servicing French debt could explode. In that scenario, France might be forced to seek assistance from the International Monetary Fund and appeal to the European Central Bank — a humiliation for the world’s seventh-biggest economy, he wrote in a New York Times op-ed.
France’s public debt now stands at a record $4 trillion, or 119% of GDP, the highest ratio since the immediate aftermath of World War II. Bond yields have climbed to their highest levels in 24 years, flashing warning signs not seen since the eurozone debt crisis in 2011. While the pandemic and the wars in Ukraine and Iran worsened the fiscal picture, President Emmanuel Macron has also pulled back from reforms meant to rein in the debt.
The market’s distrust of France is more political than economic, Rahman argued, reflecting fears that the country has become ungovernable. Far-right leader Marine Le Pen has vowed to roll back the official retirement age to 62 and has previously suggested dropping it to as low as 60. Far-left presidential candidate Jean-Luc Mélenchon is campaigning on a plan to have the central bank cancel its holdings of French debt. With both far-right and far-left candidates leading ahead of next spring’s presidential election, investors worry that neither side will take the painful steps needed to control the deficit.
Rahman described France as suffering from a crisis of liberal democracy, a crisis of fiscal mismanagement, and a crisis of youth disaffection, with the fiscal crisis the most dangerous of the three. He pointed out that while France’s education spending tops the European Union average, more than a quarter of that money pays for pensions of retired teachers. Nobel laureate Paul Krugman similarly drew a direct line from France’s generous retirement system to student unrest, arguing that education spending has suffered because the country is effectively subsidizing older French at the expense of everyone else.
Earlier this month, mass demonstrations saw students decry run-down classrooms, missing teachers, and buildings unequipped for rising temperatures, blaming years of underinvestment in public education. Saturday’s protests widened that anger into broader cost-of-living grievances, and the rioting that followed has deepened concerns about social volatility.
Thierry Wizman, global FX and rates strategist at Macquarie Group, argued that a series of convulsions would have to occur for France to appease the bond market. That could include a no-confidence vote that leaves the Assembly unable to govern, a Moody’s credit downgrade, a widening of street protests and violence, a sharper spike in France’s bond yield spread, and the election of Le Pen as president. The European Central Bank would not come to the rescue quickly for fear of encouraging moral hazard, Wizman added, and other bailout mechanisms lack the firepower for an economy as large as France’s.
France could still avoid imminent catastrophe this coming week if Le Pen orders her allies in the Assembly to abstain on the budget, allowing it to pass. According to Rahman, that may avert, for now, the kind of meltdown suffered by Greece after the financial crash. But he cautioned that France is no longer in control of its destiny, with an explosion in borrowing costs signaling that the country is at the mercy of the bond market, which has begun pricing in growing odds of a debt default.
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