Economics Update November 2026 - France's Debt Problem: Why the ECB Is Taking a Wait-and-See Approach for Now

The yield spread between French government bonds and German Bunds has narrowed in recent days from more than 170 basis points to about 150 basis points. However, the underlying problem persists: the unsustainability of France’s public finances. A cap on government spending is needed. Even excluding interest payments, government spending already amounts to more than 55 percent of GDP. Therefore, reducing the budget deficit must primarily focus on the expenditure side. However, it is highly unlikely that such a fiscal policy turnaround will succeed in the run-up to the presidential elections in April of next year. Lower spending and budget discipline are unpopular in France—as they are in other countries as well. So far, there has been a lack of political and social support for fundamental fiscal consolidation.

However, pressure from market participants could force a fiscal policy shift. For investors in government bonds, alarm bells start ringing at the latest when interest rates rise above nominal economic growth. That’s because ever-increasing debt levels are then inevitable. This is the case in France. For this reason, investors are demanding ever-higher risk premiums, even though it is unlikely that anyone truly expects the French government to default and the bonds to have to be written off. However, the position of far-left politician Jean-Luc Mélenchon of the party La France insoumise—that the debt could simply be written off—shows that such a possibility is by no means considered unthinkable in some quarters of the political class.

This complex situation could lead to a spiral of escalation with ever-rising interest rates, which could only be halted by credible measures to consolidate public finances. However, as explained above, the likelihood of this is low. That is why all eyes are on the ECB. It would be the only institution capable of halting the rise in yields by reviving its “whatever it takes” stance and engaging in massive purchases of French bonds. It is immediately plausible to assume that the ECB would indeed do this in an emergency, as the alternative would pose a serious threat to the entire monetary union. A suitable monetary policy justification would certainly not stand in the way. The history of the ECB’s previous aid and crisis programs demonstrates this impressively.

A Change in Fiscal Policy as a Prerequisite for ECB Intervention

At the same time, however, it is reasonable to assume that the ECB will not intervene for the time being. This is because, by demanding higher risk premiums, market participants are exerting the necessary pressure: they are forcing French society and its political representatives to recognize the need for a fundamental realignment of fiscal policy and to initiate appropriate measures. This is precisely the prerequisite for an ECB crisis program to be truly effective. If the central bank were to intervene without France changing its fiscal policy, this could undermine its credibility and, ultimately, the stability of the eurozone in the long run.

There is strong evidence to suggest that yields on French government bonds will remain a key issue in the capital markets in 2027 as well. At least a temporary escalation is entirely possible. For the time being, the ECB will avoid any appearance of using one of its support programs to benefit France. However, should serious risks arise at some point, it would almost certainly intervene. For French government bonds, this means that yields are expected to fluctuate sharply and possibly rise again, but a default is not expected.