London
The unprecedented wave of student protests in France has laid bare the country’s growing financial pressures, which will become increasingly difficult to manage as Europe’s second-largest economy tries to bring a growing budget deficit under control.
The country’s finances are in a precarious state. Public debt stood at more than $4 trillion in June, surpassing the size of the economy, according to the country’s statistical agency. The cost of servicing this debt has increased by several billion dollars compared to last year, as bond yields soar.
At the same time, pressure on public funds is increasing: the cost of pensions has increased due to the aging of the population while the government seeks to spend more on defense.
High school students, meanwhile, have demanded a solution to staff shortages, overcrowded classrooms and crumbling school infrastructure.
Solutions to France’s financial problems have led to social unrest in the past. Efforts to raise the retirement age have sparked widespread protests in 2023.
The French government last week proposed deep spending cuts and tax hikes aimed at reducing the budget deficit, but bond buyers fear the tax measures could be watered down by lawmakers ahead of next year’s presidential elections, said Andrew Kenningham, chief European economist at consultancy Capital Economics.
The election could see President Emmanuel Macron ousted by a far-right or far-left successor, raising questions about the country’s commitment to fiscal discipline. While Marine Le Pen’s right-wing National Rally recently proposed substantial spending cuts Aimed at stabilizing public finances, his party also remains committed to costly tax cuts, Kenningham said.
“Investors will also be concerned about increased fiscal populism after the election,” he wrote in a note last week. “There is a significant risk that spreads will increase significantly further, either before or after next year’s elections.”
Concerns about a possible debt crisis in France erupted last week, leading to a sell-off in French bonds and a sharp rise in yields.
The gap between French and German bond yields has reached its highest level since 2012. This yield difference means that investors are demanding much higher yields to hold French debt compared to those of Germany, which is considered a safer alternative.
The rout in French bonds has sparked fears of spillovers into other high-yield European debt markets, with some analysts drawing parallels with the euro zone debt crisis of the early 2010s.
Given France’s size and systemic importance, “the potential for contagion to other countries and the eurozone as a whole is very significant and could potentially cause a serious crisis across the region,” Angel Talavera, chief European economist at Oxford Economics, a consultancy, told CNN.
These worries largely pushed the euro to its lowest level against the dollar since May 2025 on Monday. The currency, shared by 21 European Union countries, is worth around $1.12, after briefly falling below that level.
The latest market turmoil could weigh on a fragile economic recovery in Europe, supported by investments in artificial intelligence, stronger demand for European exports and higher defense spending in Germany.
Recent survey data showed that activity in manufacturing and services in the euro zone grew last month at its fastest pace in almost three and a half years.
“(Economic) growth is making a comeback and Europe has shown surprising resilience,” wrote economists at Morgan Stanley in a note at the end of September.
However, high bond yields pose a clear risk to this growth.
If governments do not reduce spending, “Interest rates will continue to rise,” Carsten Brzeski, head of macroeconomics at Dutch bank ING, told CNN.
Higher bond yields drive up the cost of borrowing across the economy, making home and car purchases more expensive and depressing investments. They also make it more expensive for governments to borrow money and impose a degree of austerity to prevent yields from continuing to rise.
Yields on French, German and British government bonds have broken multi-year records in recent weeks as concerns grow over the sustainability of public debt.
Europe’s public finances pose “serious risks to eurozone financial markets and the economy,” said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, told CNN.
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