PARIS—Why is France the biggest loser from the ongoing global bond market rout? Combine high indebtedness (119 percent of gross domestic product), no parliamentary majority to speak of as everyone positions themselves for a likely presidential runoff, and now student protests, and you have a recipe for institutional investors to dump their holdings of previously prized French debt.
In April 2025, when the introduction of Trump’s “Liberation Day” tariffs caused an ultimately short-lived “Sell US” trend in the market, eurozone debt was a natural refuge for asset managers. And given the lack of any equivalent to the forty-trillion-dollar US treasury market, investors had to choose from different pools of national debt. There weren’t enough of the best-rated options like Germany and the Netherlands to go around precisely because these governments have run tighter budgets over the years and have less debt on the market. French debt, some have quipped, was the closest you could find to a eurozone safe asset. And so investors continued to pile in, overlooking some already clear facts that should have given them pause.
The first is that Paris struggled to wind down the “whatever it takes” spending sprees it embarked on during the COVID-19 pandemic and the early energy price spike caused by Russia’s 2022 invasion of Ukraine. Whatever one thinks of the usefulness of the policies at the time, the really alarming fact is that ministries allowed exceptional schemes—ranging from furlough and energy subsidies to bicycle repair vouchers—to go on into 2024 or even to this day.
France’s political class has never been the best at making tough decisions because of the public’s well-known propensity to protest, which has been passed down through the generations. The latest young crop is living up to this French tradition in the current wave of mass protests now rattling the country. Even a swivel-eyed libertarian should sympathize with the more reasonable demands of students, especially for better-equipped schools after a sweltering summer and better salaries to prevent classes going for months without replacement teachers. But more and more of the education budget is instead being swallowed by the Education Ministry’s bulging pensions bill.
The burden of France’s pension system takes up nearly 25 percent of all public spending and is squeezing out spending on the future. Very little can be done because of a second shift that bond markets should have spotted earlier.
The sharp deterioration of France’s political climate started well before the bond market rout. President Emmanuel Macron was reelected by default in May 2022 after a campaign dominated by Russia’s still-new full-scale invasion of Ukraine. The electorate registered their frustration in the subsequent parliamentary elections, where the president’s party and its allies failed to win an absolute majority. This hampered the government’s ability to pass a much-needed pensions reform, which had been postponed two years earlier at the onset of the pandemic. It was ultimately passed using an unpopular constitutional device that allows governments to bypass parliament provided they survive a confidence vote. Voters got their own back in the June 2024 European elections, when Macron’s party did so badly that he decided to call early elections.
This decision was a shock to many but it is true that the then government was clearly not going to be able to pass a budget a few months later. Still, it has left France with a parliament split three ways, between the left, the Macron-compatible centrists, and the far right, which ultimately only came in third. Two centrist governments have come and gone since, barely managing to pass budgets and only at the price of reversing the insufficient pension reform to secure enough left-wing votes.
The third government of the new, balkanized parliament age has been led by the surprisingly resilient Sébastien Lecornu, who resigned after less than twenty-four hours in power last October yet somehow is still prime minister. His government’s strategy is to bring spending back in line with the trajectory to 3 percent, which means a budgetary effort of €54 billion. Exogenous factors like the Strait of Hormuz crisis mean the deficit will still be at 5 percent of GDP next year, but good-faith observers will see that real efforts are being made, especially on the expenditure side. Finally, a taboo is breaking around overprivileged pensioners. Leaving the debate on retirement age to the presidential campaign, the government’s draft 2027 budget instead proposes to no longer fully index pensions above €1,260 a month to inflation, and to lower the ceiling on a special 10 percent tax rebate for pensioners to three thousand euros.
Pensioners vote, so you can imagine how enthusiastic parties that want to win the presidential election are about these measures. Yet the bond market’s recent tank does provide the government with a credible argument that failure to pass the budget will only make the situation worse. Too few left-wing votes are available now, as some of the Socialist Party is open to cooperation with the far-left run by Jean-Luc Mélenchon, whose reactions to the recent bond market distress have ranged from calling for the European Central Bank to cancel its holdings in French debt to suggesting that the governor of the Banque de France—who has commented on the need for budget discipline in the foreign press—should be tried for treason.
But the far right is trying to build its own credibility on economic affairs, ahead of an expected presidential runoff where its candidate, Marine Le Pen of National Rally, will still need to convince cautious right-wing voters like business owners. When presenting her counterbudget and its unconvincing “savings plan” this week, she did keep the door open to whipping her MPs into voting through the government’s budget, provided its flaws were “reversible” once she wins power.
It is easy to despair over the political gridlock and the lack of any obvious debt reduction path. Cynics have taken to saying that only some combination of European Central Bank (ECB) liquidity assistance and an International Monetary Fund (IMF) bailout—both coming with stringent conditionality—could work. The situation is bad enough for this suggestion not to be a flippant joke, though ECB representatives have said conditions haven’t deteriorated that far yet. But nor should we just shrug and wait for things to get worse.