France is on fire – are we heading for another euro crisis?

Are the protests in France over?

No. Scores of high schools across France were once again blockaded and unions were planning a nationwide strike, with rail workers, teachers and private-sector employees all expected to join demonstrations in cities across the country. The original students’ protests were widely seen as being fuelled by legitimate specific concerns, says Rafaela Uzan of the Council on Foreign Relations – overcrowded classrooms, overpacked schedules and crumbling infrastructure. But the protests and rioting in France reflect a broader “generational divide” too that will be hard to contain. In a country where youth unemployment is high and state spending on pensions account for roughly 15% of GDP, many young people are angry and fearful about their prospects. Combined with wider grievances over the cost of living and fuel prices – plus opportunistic violence from “black bloc” anarchists and associated looting – the nation has boiled over in recent weeks.

France’s mounting fiscal and debt pressures, which have sent its bond yields soaring in recent months – a situation worsened by the wave of unrest and political instability. After years of overspending and complacency, the Fifth Republic finds itself caught in a triple bind: deteriorating public finances, a society deeply resistant to cuts in public spending and a political system incapable of resolving who should pay for the bloated state.

GDP, the highest in Europe after Finland – and the state owns nearly all public services, public transport, energy and utilities. Of an adult population of more than 55 million, over 30 million depend on the state for most of their income in the form of pensions, state jobs and welfare payments, says Andrew Neil in the Daily Mail. State pensions take up 15% of GDP, six points more than the European average. The trouble is that tax receipts don’t match outgoings – and haven’t done so for years. State spending accounts for 57.3% of GDP, but tax revenues for only 52.2%. Last year, the budget deficit was 5.1% of GDP, the fourth highest in the EU. The overall debt pile is €3.46 trillion, or 116% of GDP – the third highest in the EU after Greece and Italy. But it is the rate at which the cost of servicing the debt is rising that really has credit markets spooked. Debt payments rose from 1.3% of GDP in 2020 to 2.2% in 2025 and will hit 2.6% this year.

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Emmanuel Macron called a general election – after taking a sound beating in European elections – in a misconceived attempt to reassert his authority. It left the National Assembly hopelessly divided between three blocs (Marie Le Pen’s hard right, Macron’s allies and a hard-left coalition including Jean-Luc Melenchon – but with no route to another election. The annual process of passing a budget “turned to chaos”, says The Wall Street Journal – toppling successive prime ministers who had proposed big spending cuts and rattling markets. Since then, the budget deficit has been stuck above 5% and could reach 6.8% of GDP by 2030.

Extremely unlikely. The EU’s second-largest economy remains well diversified, with a deep government bond market and access to the eurozone’s financial infrastructure. The problem is one of increasingly constrained fiscal choices and national decline rather than imminent insolvency. That said, credit markets are certainly worried. French ten-year bonds are trading at a yield of around 5%, more than 150 basis points above the German equivalent (meaning lenders see France as a riskier prospect). This risk premium, relative to Germany, has roughly tripled since February and is the widest since the 2011 euro crisis, making France the riskiest sovereign in the single-currency bloc. Even so, say analysts, there are no immediate grounds for panic. The cost of debt servicing is still notably lower than Italy and is manageable, says Neil Unmack on Breakingviews. With an average debt maturity of about eight years, even big jumps in yields will take time to feed into borrowing costs. France’s own citizens own half of the debt and there’s room for banks to step in and buy more. And the ECB would “almost certainly rescue the country before the point of sovereign default”. Europe cannot afford to let France’s €3.1 trillion economy fail, not least because doing so would imperil the single currency itself.

In the French election due next spring, the likeliest outcome is a win by the populist hard right or hard left, neither of which has any remotely credible plan to tackle the fiscal crisis or economy. And that might change investors’ confidence that the ECB will ride to the rescue: Le Pen and Melenchon are “not the kinds of French presidents that ECB technocrats will rush to rescue”, says Mehreen Khan in The Times. But does that mean investors should steer clear? Not necessarily, says David Stevenson in The Telegraph. French bonds have been falling steadily and so have the country’s “unloved” stocks – down this year while other European markets are up. But if the French debt crisis sends the euro lower, it will be good news for many French businesses. Bold investors take note: France still boasts a distinctive “collection of world-beating businesses that will probably ride out any impending political storm”.