The debt crisis leaves the French government with no room to respond to social demands

A little over a month ago, at a high school on the outskirts of Paris, a group of students blocked their school to protest the condition of the facilities and the lack of teachers. Within days, students from other schools joined in, first in Paris and then across the country, complaining of leaks in classrooms and even cockroaches, and of walls that are cracking. They are cold in the winter and hot in the spring. That image of public schools — long considered a pillar of the French Republic, but gradually falling apart — also illustrates the economic decline of recent years.

The social and political unrest that erupted this past weekend into the most violent demonstrations seen in a long time has its roots in the country’s moment of economic strangulation: runaway debt levels, weak growth and cuts to the public system. The current crisis risks worsening the problem because “the government has little room to maneuver,” Alexandra Roulet, president of the Circle of Economists of France and a professor at the INSEAD business school, told this newspaper. “For years it has been taking measures every time there is a crisis, but that has not succeeded in calming the protests on the streets,” she added.

France is caught in a spiral in which not only citizens are angry but investors are also increasingly wary, selling off French debt they no longer see as reliable. The 10-year yield on French bonds reached 4.96% on Tuesday, very close to the psychological 5% barrier, compared with Germany’s 3.43%, which is viewed as a safer investment. It is a level of strain not seen since the sovereign debt crisis of 2012, when the focus was on countries such as Greece, Portugal, Italy and Spain. Back then France was a model student in the eurozone.

In this context of political, social and budgetary tensions, investors demand a higher yield to lend money to the state — precisely the one thing France cannot afford. With growth for this year forecast at 0.4%, the government intends to push through a 2027 budget that includes €54 billion in cuts, a historic figure and “well above what some economists were even proposing,” Roulet says.

“Students are asking for more resources for public education and that effort is somewhat easier to make, but as far as the high cost of living is concerned the government of Sébastien Lecornu has its hands tied behind its back. People constantly demand things from the state but ignore the serious deficit problem. In 2019, for example, during the ”Yellow Vests” crisis, there were not the budgetary problems that exist today,” the economist says.

Making economic concessions to the various demonstrators to calm the anger would raise the country’s colossal debt. France has a deficit of 5.4% of GDP, far above the 3% Brussels requires and among the highest in the eurozone, and a debt-to-GDP ratio of 119%. It is at its highest level since the end of World War II, and the rating agency Fitch warns it could reach 128% of GDP by 2030.

The succession of crises has worsened the problem. “First came the yellow vests, who demanded state aid to offset rising fuel costs; then came Covid; and in 2022, when the war in Ukraine broke out, electricity prices were frozen to help households. All of that has had a cost,” the expert says.

Fifty-five percent of French debt is held by foreign investors and what happened this weekend does not inspire much confidence. The attacks and damage over the past days will worsen the situation, since the bill — including damage to buildings and street furniture and more than 3,000 businesses affected — is expected to be colossal. “As far as shopkeepers are concerned, the government must do something, although the underlying problem has not been solved and that requires structural reforms,” the expert says.

France has for two consecutive years passed its budgets after the constitutional deadline and by decree, without a parliamentary vote, because the government lacks a majority. The threat of major cuts is what brought down previous governments, such as those of Michel Barnier and François Bayrou. These prime ministers lasted only a few months in office. Sébastien Lecornu has been at the helm for a year and has already accepted that the deficit reduction target for this year, given the succession of crises, is unattainable.

With six months to go before the presidential election, the recent unrest feeds support for Marine Le Pen’s far-right party and, at the other end of the spectrum, for leftist Jean-Luc Mélenchon. Le Pen proposes €140 billion in cuts over six years and wants to reduce the country’s EU contributions. Mélenchon proposes an additional €80 billion in spending. Aside from the current crisis, which stems from the economy, the expert believes that “in the long term the key element will be this electoral date, that candidates propose realistic plans and structural reforms to solve the underlying problem. The opposite, and even more so if there is no parliamentary majority, will further rattle markets.”

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