Uzay Bulut
December 24, 2025
I have repeatedly written about the French fiscal crisis, most recently on October 21st. I warned then that international investors and credit rating agencies have just about had it with the unending political dysfunction in Paris.
I have also warned that the fiscal problems plaguing the French government are not unique to France.
The downgrade that hit France last week was an ’emergency measure’ on behalf of the Standard & Poor’s (SGB Global) credit rating agency. For this reason, it is time for the ‘other side’ of the credit rating to heed the warning and act accordingly.
The crisis that is now slowly sinking France into credit turmoil is not limited to France: the entire euro zone is in peril.
It is a crisis that was totally avoidable. But the EU, as well as its member states has, at best, treated the symptoms of the last big crisis. The root cause—a structurally unsustainable welfare state—remains in place.
For this reason, we should not be surprised to hear ominous echoes of the debt crisis 15 years ago. So far, those echoes are only whispers, and there is still time for Europe’s governments and the ECB to take appropriate measures to avoid a repetition of history. However, that time is running out fast, and when I scout the daily European news cycles, I see no signs of any kind of debt crisis awareness.
There are feeble, almost token-style efforts in France at recognizing the problem, but they will amount to nothing when, in the coming months, the credit agencies put France on the junk-bond downslope.
A French fiscal meltdown is bad enough, but what should really worry every finance minister, every central banker, and every taxpayer in the EU is the spreading of that meltdown to other countries in the currency union. Economists use the term ‘contagion’ to describe this phenomenon, and they used the term abundantly during the Great Recession.
So far, this time around, I have not seen it used much. That is unfortunate: if the French crisis deepens—and I see every reason why it will—there will be repercussions for the rest of the euro zone. This happened the last time around, and nothing institutionally has changed since then to prevent another crisis contagion event.
On the contrary, the very fact that there is no conversation about this phenomenon today suggests that the EU, the ECB, and the national governments in the euro zone will be taken by surprise when the crisis erupts.
Just like last time.
There are a number of indicators that suggest Europe is ripe for another wave of fiscal crises. On the macroeconomic side, we have slow-to-no GDP growth, persistently high unemployment, and rising uncertainty among businesses. That uncertainty pertains in no small part to energy costs and bad, persistent regulations—especially of the ‘green’ kind—that stymie innovation and growth. This holds back business investments, a.k.a., capital formation.
Meanwhile, high taxes and high costs of living cripple household finances across the euro zone. The result is a suppression of private consumption. When weak capital formation and stagnant household spending are added together, there is practically no room for the economy to grow. It does not help that there is uncertainty about EU-U.S. trade relations, but that uncertainty is not the primary source of Europe’s deep, structural economic weakness.
The macroeconomic view provides an essential framework for assessing how far down the fiscal crisis road the euro zone has gone this time. If variables such as GDP growth, capital formation, and household spending were at least generally positive, there would be no real reason to expect a broadsided, euro-wide fiscal crisis. However, with the macroeconomic numbers as bad as they are, the risk is considerable for widespread problems with government debt.
If we dive below the macroeconomic surface, there are plenty of signs of fiscal trouble. The most damning among them is the number of countries with red ink in their government finances. If we widen the perspective to the entire EU, we have a situation that is, in fact, even worse than it was when the Great Recession hit in 2008. In 2024, a dozen member states were in breach of the EU’s fiscal rules:
In contrast, in 2007, the year before the last crisis, only seven member states exceeded the 60% debt limit. The budget deficit rule was broken in only two of the EU’s members at that time.
Figure 1
It was not until the Great Recession and its fiscal crisis were in full force in 2009 that the number of member states with excessive debts and deficits grew higher than they are today.
If we add up the budget deficits in the euro zone, they amount to 3.1% of the currency area’s GDP. In 2007, that same number, for the same set of countries, was only 0.7%. In other words, the deficit problem is 4.5 times bigger today than it was the year before the last big crisis broke out.
Things do not look better on the debt side. In 2024, the current 20 euro zone members had a total government debt of 87% of the zone’s GDP; in 2007, the same 20-country configuration had a deficit equal to 66% of GDP.
I can hear some analysts and commentators point to the 2020 pandemic and brand today’s higher debt and deficit levels as lingering effects from the artificial economic shutdown back then. That is, however, an invalid argument. If the economies that were hit by the shutdowns were fundamentally strong—like the American economy—then we would have seen a continuation of positive trends in macroeconomic variables and in public finance once the shutdown was over.
None of that happened in Europe. Instead, the post-pandemic years have exposed a European economic sclerosis that will not end until the continent’s political leadership gets their act together. As a result, the threat of a new, major fiscal crisis will slowly grow in strength—until a crisis breaks out.
There is one more reason to believe that such a crisis is not far away. The cost of government debt is back to, or higher than, right before the Great Recession. Let us, with the help of our friends at TradingEconomics.com, review the yields on 10-year bonds denominated in euros.
Figure 2a reports the weighted average yield on that debt security for the euro zone as a whole. Notice how the yield—and thereby the cost of government debt—fell substantially from 2012 on; the decline began at the end of the Great Recession; the lower levels held their own through 2021. Then there was a sharp rise again:
Figure 2a
As Figure 2b below reports, the German 10-year bond has followed a similar pattern. This is not surprising, given that Germany is the largest member of the euro zone.
Figure 2b
Next, we compare the German bond to the French equivalent. Two worrisome points emerge, the first of which is that the French yield is already at or above where it was during the last crisis. This should send shivers down the spines of the French government—and whoever is its prime minister this week—especially since
The second worrisome point has to do with the difference between French and German yields:
Figure 2c
German government finances are not exactly in good shape; their consolidated budget deficit has grown from 1.9% of GDP in 2022 to 2.5% in 2023 and 2.7% in 2024. Together with the political instability in Berlin, that trend does not exactly inspire confidence. However, when investors look at buying French government debt, they want a risk premium over the German equivalent.
The scary part here is that this risk premium was smaller in the lead-up to the Great Recession and its fiscal crisis than it is now.
At this point, the inevitable question is, what does the near-term future look like? When answering this question, it is impossible to ignore the Greek tragedy that came to characterize the Great Recession. Here is what TradingEconomics.com reports regarding the yield on the 10-year Greek treasury bond over the past 25 years:
Figure 2d
Today, France and Germany—to stick to those two examples—are paying a 2.5–3.5% yield on their 10-year bonds, rates that barely even register in comparison to the Greek yield history. However, the point of this comparison is to let it serve as a worst-case scenario for what may lie ahead for the euro zone in the coming months.
As Figure 2c shows, the yield on the French 10-year bond has been rising slowly but steadily for the past two years. Now that Standard & Poor’s took the extraordinary measure to downgrade them between regular meetings, we have good reasons to expect a dramatic change for the worse in that trajectory.
If that happens, will it rise as rapidly, and to the same heights, as the Greek yield did in 2010-2012? Probably not, but that’s not a very reassuring probability. However, even if the French yield rises to ‘only’ 10-12%, it will be an absolute disaster—politically and economically—for France.
By that time, contagion will be fully at work spreading this new fiscal crisis to other EU member states. Remember: due to worse public finances and a weak macroeconomy, the crisis fuse is shorter this time around.
