France is on fire but something more dangerous burns below the unrest

Violent unrest in France where protestors have set several buildings on fire has exposed a problem that goes well beyond public anger over rising prices and deteriorating schools.

France is struggling with a swelling public debt burden while investors are losing patience with a government that has yet to show it can bring spending under control. The pressure is particularly uncomfortable for President Emmanuel Macron, whose administration faces mounting unrest just months before the 2027 presidential election.

What makes the situation dangerous is that the policies needed to restore confidence in France’s government finances could deepen the social discontent already spilling onto the streets.

A bigger crisis looms over France

The most immediate problem is the widening gap between what the French state spends and what it collects. France has run persistently large budget deficits, leaving its public debt at around 3.5 trillion euros, close to 120% of the GDP. The government is caught between mounting fiscal pressure and angry people unwilling to accept austerity measures.

The challenge is not simply the size of the debt. France must also convince investors that its government can agree on a credible plan to stabilise it. The proposed 2027 budget is central to that effort, but the government faces political resistance to measures that would reduce expenditure or increase revenue.

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Importantly, the unrest is unfolding just as the government needed to pass a budget bill to rein in public finances. Political friction over the response to the riots could further unsettle investors at precisely the wrong moment.

The danger is that fiscal weakness might become self-reinforcing. A government unable to control its deficit accumulates more debt, and if investors then demand higher interest rates, refinancing that debt becomes more expensive, adding to the deficit that policymakers are trying to reduce.

France is not yet necessarily facing a sovereign debt crisis but the longer it struggles to produce a credible fiscal plan, the harder it becomes to dismiss that possibility.

The French bond market is on fire too

The clearest warning is coming from France’s government bond market. The 10-year French borrowing yield had climbed towards 4.9%, its highest level in more than two decades. The spread over equivalent German bonds was hovering near 140 basis points, reflecting the extra return investors demand to hold French debt rather than Germany’s. The IMF’s European department said the rise was manageable for now, but warned that sustained high yields would increase pressure on Paris to deliver a credible medium-term fiscal plan.

To be sure, the concern is not that France will suddenly run out of money. Its long debt maturities and diversified investor base provide some protection. The problem is the cost of refinancing debt as older bonds mature. Higher rates gradually feed into government interest payments, leaving less room for public services and making deficit reduction more difficult.

French borrowing costs have overtaken those of Italy and Greece, countries previously associated with greater sovereign risk. Some French companies are reportedly borrowing more cheaply than their own government, an unusual signal of weakening confidence in the sovereign borrower.

The European Central Bank is not offering an easy escape. ECB President Christine Lagarde said a few days ago that the primary solution to France’s debt problem lay at home, in its fiscal policies. Markets cannot assume that the central bank will step in to protect French bonds regardless of the government's decisions.

The talk of austerity is combustible

To improve its finances, France needs to restrain spending, but people are demanding better services from a state they believe is failing them.

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The protests brought together students, labour unions and other protesters angry about living costs and poor school conditions. The Interior Ministry estimated turnout at 550,000, while organisers put it at 800,000. Protests quickly descended into violence and looting spread across several cities.

The education dispute is not just about perceptions. In France, pension costs consume nearly a third of the budgets of some ministries. The education ministry allocates 28.5 billion euros, or 32% of its budget, to pensions for retired civil servants. The equivalent share at the interior ministry is 30%. Across ministries, pension costs average 13% of budgets.

That creates a direct connection between the pension debate and deteriorating public services. Money committed to retirement benefits leaves less room for other spending, including staffing and facilities. Since 2000, pension spending has risen by 2.5 percentage points of GDP while education spending has fallen by 0.5 points, as per a Reuters report.

These figures explain why calls for more education funding collide with the government's fiscal constraints. Cutting budgets can intensify shortages, but expanding spending without identifying sustainable funding makes debt reduction harder.

The wider cost-of-living grievance adds another dimension to the problem. Households can remain under pressure even when inflation eases, because lower inflation does not reverse previous price increases. For young people facing overcrowded classrooms and uncertain prospects, the dispute over public spending becomes a question of whether the state is investing in their future.

The 2027 election could deepen the crisis

France’s economic predicament is becoming inseparable from its political future. Macron’s minority government is trying to push through a budget while opposition parties resist measures that could alienate voters ahead of next year’s presidential election.

As per reports, the proposed budget seeks 43 billion euros in cuts and tax increases, with a target of reducing the deficit by 40 basis points to 5% of GDP in 2027. The measures include limits on pension increases and civil-service salaries. Meanwhile, debt interest payments are projected to reach 91.2 billion euros in 2027, exceeding spending on education or defence.

Approving the budget would not eliminate the deficit, but failing to agree on credible measures could further undermine market confidence. Any government that will try to impose deeper pension reforms or spending restraint would risk renewed protests. A future administration may face the same problem if it inherits a fragmented parliament.

Macron’s weakened political position has left him with little room to respond to the unrest through additional spending. Unlike during the Yellow Vest protests of 2018 and 2019, when his government offered billions of euros in concessions, the country’s strained finances limit its ability to buy social peace.

If governments repeatedly postpone difficult fiscal decisions, debt servicing can absorb more resources and force harsher adjustments later. But if they move too quickly, they can damage public services and provoke a backlash that makes reform impossible.

The immediate violence is also creating its own economic costs. Stocks fell and bond yields rose on Monday as investors reassessed the implications of political instability.

The government must turn the present crisis into a credible agreement on public finances before the election campaign overwhelms policymaking. Macron has called for talks involving students, teachers, unions, lawmakers and business leaders, but has yet to set out a detailed response that reconciles their demands with the budget constraints.

France still has significant economic strengths and is not on the verge of automatic default but its room for manoeuvre is narrowing. The protests have made visible a fiscal conflict that bond investors had already been pricing in. Unless the next budget offers a believable path towards stabilising debt while addressing the deterioration of public services, the country could face more dangerous challenges in 2027.