When things got tough, European finance ministers used to sigh and say that at least they were not Greek. Today, some would struggle to make such a comment. On December 2nd the yield on Greek bonds fell below that on French ones, indicating investors thought it safer to lend to Greece than France. The yield on French bonds is now 0.8 percentage points above German bunds, the euro zone’s benchmark, which is the widest gap since the near-collapse of the euro in 2012. On December 4th the French government crumbled in a row over spending.

Will European finance ministers soon sigh and say that at least they are not French? The EU’s second-biggest economy faces severe problems. The first is the government’s fiscal deficit. At over 6% of GDP, this year’s figure will end up much higher than the government had predicted and independent forecasters had expected. Worse still, the IMF expects the deficit to stay at this level—well above the 3% maximum mandated by the European Commission—until the end of the decade.

Wide deficits add to France’s debt level, which is forecast to reach 115% of GDP next year, about 17 percentage points higher than in 2018. By 2029 it will have reached 124% of GDP, according to the IMF. Spending on interest payments is thus expected to rise from 1.9% of GDP to 2.9%. And that is based on healthy economic growth expectations. Goldman Sachs has cut its growth forecast to just 0.7% next year. If the bank’s analysts are correct, interest payments will be even more painful and debt higher still relative to GDP.

France has not been the only big spender. Even countries usually renowned for their fiscal hawkishness, including Austria, Germany and the Netherlands, have experienced widening deficits in recent years (see chart). The COVID-19 pandemic and the energy crisis that followed Russia’s invasion of Ukraine got things going. Indeed, in 2022 governments spent more supporting their economies than after the global financial crisis of 2007-09, notes Sander Tordoir of the Centre for European Reform, a think-tank. Later, with memories of the euro crisis fading, politicians spent big in an attempt to reduce burgeoning support for populist parties, at the same time as increasing expenditure on the green transition and their armed forces.

All countries have now submitted fiscal consolidation plans to the European Commission. The French one is ambitious, aiming to cut the deficit by 0.5 percentage points of GDP a year, enough to stabilise the debt level. At the moment, however, such a plan looks politically impossible. And the French government is not the only one coming to terms with its budgetary constraints. Germany’s recently collapsed, too, because of spending disputes. Italy will feel the strain in the next few years.

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Jean-François Robin of Natixis, a bank, expects French spreads over German bunds to come down over the next year, before spiking again ahead of parliamentary elections that are likely to be held in the summer. The respite does not reflect the country’s economic outlook, but rather the fact that France benefits from being at the core of the eurozone, along with Germany. Historically, this position has meant that France could borrow at close-to-German interest rates, while running much more expansionary fiscal policy, notes Davide Oneglia of TS Lombard, a consultancy. Now it is preventing the country’s borrowing costs from really soaring.

Whether markets continue to offer such concessions depends on how politically unstable France becomes. There is no immediate threat of a financial crisis, banks remain strong and the European Central Bank (ECB) has made clear that it stands behind member countries’ debt, even if it has not said so explicitly. But unless France manages to show commitment to actually cutting its deficit, the ECB will struggle to step in and buy French bonds. Should French spreads continue to widen, the bank’s policymakers will be put in an awkward political position. They may need to prepare for more awkwardness, since France is just one of many countries struggling to make ends meet.

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