France's financial pressures are intensifying as borrowing costs climb and political turmoil complicates efforts to stabilise public finances. The yield on France's 10-year government bond hovered near 4.9% on Monday, close to its highest level in over two decades, after a weekend of violent demonstrations across the country. Protesters are demanding action on the rising cost of living and deteriorating public services, including education.
The unrest adds to the strain on the government as it tries to push a credible 2027 budget through a deeply divided National Assembly. The immediate task is to pass a budget that reassures investors ahead of the presidential election in spring 2027. But restoring confidence will also depend on whether the next administration can commit to multi-year improvements in public finances.
Why investors are worried
France carries one of the highest public debt ratios in the EU, at 119% of GDP, according to INSEE, the national statistics office. The government forecasts a deficit of 5.4% of GDP in 2026, and public debt stood at €3.596 trillion at the end of June 2026. Debt servicing costs are rising sharply: interest payments are projected to reach €91 billion in 2027, up from €79.2 billion this year.
Accelerating inflation and weak growth threaten to erode tax revenues and push the deficit and debt even higher. This leaves little room for the government to respond to protesters' demands with another large spending package, similar to President Emmanuel Macron's "whatever it costs" approach during the pandemic.
The government faces pressure to reduce the deficit and commit to lasting savings to calm bond markets. If borrowing costs keep rising, France's debt could become increasingly difficult to control. And a spiralling crisis could spill over to other major eurozone economies, particularly Italy.
How France's troubles could hit Italy
Oxford Economics modelled the impact of bond turmoil in France, with some contagion to other high-debt eurozone countries. It found that Italy would be especially vulnerable because it combines slow growth, high debt, and investment that is sensitive to tighter financial conditions.
The gap between France's 10-year bond yield and Germany's equivalent—the spread—has risen to around 145 basis points, still slightly below the peak reached earlier this month, which was the highest since the eurozone debt crisis of 2011–2012.
Oxford Economics outlines a baseline and two adverse scenarios. Its baseline assumes the French spread stays below 200 basis points ahead of the April 2027 presidential election and narrows afterwards. It continues to view a French debt crisis as an unlikely but potentially damaging outcome, not its central forecast.
In the moderate adverse scenario, the French spread widens to 250 basis points from around 140 basis points when the report was published on 15 October. In the severe scenario, it reaches 400 basis points. Under the severe scenario, both France and Italy would enter recession in 2027. Belgium would also see a jump in borrowing costs, while Spain, Portugal, and Greece would face higher bond yields but less economic damage, with none of the three contracting. Crucially, the eurozone as a whole would avoid recession even under this severe scenario.
Andrew Kenningham, chief Europe economist at Capital Economics, described a widening of France's spread to 400 basis points as a "plausible adverse scenario, which would be comparable to Italy's spreads in 2012." He agreed that, in that case, there would certainly be a lot of pressure on other high-debt economies, including Italy.
"However, in contrast to the early 2010s, the ECB would be well placed to support countries other than France through its Transmission Protection Instrument," he said. This tool allows the ECB to buy government bonds to help keep borrowing costs under control if the country meets certain conditions. Kenningham also noted that risks to the banking sector and the risk of a property crash are much lower than in the 2010s. "So things could get very bad but not as bad as in the 2010s."
In its severe scenario, Oxford Economics projects France's 10-year bond yield reaching 7% in the second quarter of 2027, with the public deficit on track to surpass 6% of GDP. The consultancy warns that yields at such levels could trigger a liquidity crisis.
Expectations of ECB intervention to help France remain low. ECB President Christine Lagarde said last week that the means to stop the surge in French borrowing costs "must first be found in France," through budget measures to reassure investors.
What France can do to regain confidence
According to Oxford Economics, measures to calm markets could include gradual spending restraint over several years, accompanied by clear legislative commitments, especially on the retirement age. But the consultancy warns that "the current minority government will not be able to credibly commit to sustained fiscal consolidation to soothe markets." Much of the responsibility for carrying out any painful measures could therefore fall to the next administration.
Kenningham said investors are expecting the government to pass a budget that reduces next year's deficit to around 5% of GDP, "so anything less than that could lead to further loss of confidence in the French bond market." Ahead of next spring's presidential election, far-right leader Marine Le Pen's party could complicate matters further, as seen in recent political blame games following the riots. The situation remains fluid, with protests spreading and Italy weighing early elections amid its own political uncertainty.
