France’s present crisis is certainly the most acute, dangerous, and structural crisis since the end of WWII. Norbert Gaillard, economist and independent consultant, explores the nation’s prospects.
Today’s guest commentary comes from Norbert Gaillard, a Fulbright Fellow, economist, and independent consultant. Norbert studied at Sciences Po Paris and Princeton University. He was a Euromoney Country Risk expert for more than ten years. He has taught at the Ecole Supérieure de Commerce de Paris, the University of Geneva, and the Graduate Institute. He has served as consultant to the World Bank, the International Finance Corporation, the OECD, the European Parliament, the State of Sonora (Mexico), and various financial institutions and think tanks. Gaillard’s main areas of expertise are public debt and sovereign risk, credit rating agencies, and country risk. He serves as a member of the editorial board of Politique étrangère and he has published more than 40 research articles/book chapters and eight books since 2009.
In his latest book, Globalization and High Public Debt – The Impact of Financial Interdependence, Norbert
analyzes why the high degree of financial interdependence forged during the “golden age” of globalization (1991–2016) is now the main impediment to the reduction of the elevated public debts observed in many countries.
Image created by Norm Dempsey with assistance from AI.
Thanks for reading The Kotok Report! Subscribe for free to receive new posts and support my work.
France struggles for its credibility
The major protests that are shaking Paris and other large French cities have hit the headlines all over the world. France is a country that experiences frequent episodes of political and social tensions (e.g., May 1968, November–December 1995, and June–July 2023). However, the present crisis is certainly the most acute, dangerous, and structural crisis since the end of WWII. Several causes may be identified.
Unlike many European countries that recalibrated their welfare state (such as Great Britain in the 1980s, Sweden in the early 1990s, and Germany in the 2000s), France has not implemented significant economic and social reforms in the past 45 years. This lack of reform is mirrored in the absence of fiscal consolidation: At best, the public debt-to-GDP ratio stabilized when GDP growth was high (1998–2001 and 2005–2007) or interest rates were very low (2017–2019).
But why have center-leftist, centrist, as well as center-rightist governments been so reluctant to promote ambitious reforms and cut public debt? In fact, they have followed a “soft demagogy” agenda. Any powerful lobby that manages to (i) organize massive strikes or trigger protests (e.g., largest trade unions, far-leftist political parties, and the “Yellow Vest” movement) or (ii) make investments anywhere in the French territory contingent on specific subsidies or tax exemptions (e.g., large firms in the pharmaceutical and agri-food industries) is very likely to obtain financial advantages, which inevitably undermine short- and medium-term efforts to reduce the fiscal deficit.
Two Economic Dogmas
If we stand back a little bit, we could say that France has been weakened by two economic dogmas. The first (Keynesian-inspired) dogma is that a sovereign borrower never repays its debt: It just rolls the debt over. In addition, we are also told that debt can grow indefinitely provided interest rates remain below the GDP growth rate. This dubious assumption collapsed in 2022 after the Russian army invaded Ukraine and inflation soared. Despite that, a French Keynesian economist wrote six months ago that “even if excessive, our public deficit is still necessary to maintain macroeconomic stability in the euro area”!
The second (Neoliberal-inspired) dogma involves policies designed to support competitiveness. These have led to a proliferation of tax breaks and exemptions but, more dramatically, have been accompanied by cuts in “core” government spending (especially security, justice, and education). But a country’s competitiveness ultimately depends less on a favorable tax regime than on the rule of law, the quality of its workforce and its physical and non-physical infrastructures, the stability of its macroeconomic policies, the robustness of the financial system, and the efficiency of the public sector. In most of these areas, France has experienced a decline for a couple of decades.
France’s Deteriorating Credit Position
Let’s turn now to France’s credit position and political and economic prospects. France can be considered the “weakest link” in the Eurozone (Gaillard and Waibel, 2026), and this has been true for many months. As of October 30, its 10-year sovereign bond yield was the highest in the Eurozone: 4.97% compared to 4.30% for Greece and 4.49% for Italy. This percentage is driven by several concerning factors: a very low GDP growth rate (0.4% and 0.7% forecast in 2026 and 2027, respectively), a persistently high fiscal deficit (beyond 5% of GDP), and an inflationary environment, thus suggesting that the European Central Bank (ECB) might continue tightening its monetary policy in the next months. Besides, the National Assembly remains fragmented, and no ad hoc majority has emerged so far (and probably none will emerge until the next legislative elections) to agree on a real package of spending cuts.
Monitoring the Risks of Sovereign Default
In this gloomy context, investors should realize that the probability that France might default has been increasing for a few months. The key question is the following: What can be done to monitor this risk? First, Fitch, Moody’s, and S&P sovereign ratings have become unimportant: They are excessively high (Fitch and S&P: A+; Moody’s: Aa3), partly because they underestimate political and liquidity risks. Anyway, further downgrades will be announced in the short term.
Second, the evolution of France’s sovereign bond yield will be crucial. A stabilization of the 10-year bond yield around 5% would be challenging as it would involve greater consolidation efforts.
Third, the French bond bid-to-cover ratios should be scrutinized too.[1] For example, the ratios of the 12-month note and of the bond maturing in February 2032 fell from 3.5 to 2.3 and from 2.9 to 2.3, respectively, between mid-August and mid-October. A slippage below 1.5 would signal potential borrowing difficulties.
Fourth, if political tensions intensify and/or market stress increases (especially through a surge in bond yields), the ECB may be solicited to intervene and support France. This is a tricky issue. Any comment by a top French minister or an ECB top executive regarding a possible intervention could be counterproductive because it would suggest that France’s credit position is at risk, which could spread contagion to the French banking system[2] as well as to the rest of the Eurozone. By the same token, the recent announcement that ECB President Christine Lagarde will step down in February 2027 is also pretty bad news for Paris.
The frequent strikes and political and social protests observed for decades have hindered structural reforms and prevented fiscal consolidation. Consequently, the threshold beyond which public debt may become unsustainable is lower than in many other developed countries.[3] Given France’s heavy tax burden and currently high interest rates, low GDP growth, and deeply divided political landscape, this socio-economic characteristic is a big source of concern. Unless there is a clear political majority to overcome protests and cut fiscal deficit significantly, France’s credit position will continue falling.
Reference
N. Gaillard and M. Waibel, “The Credit Position of Eurozone Members Contingent on Well-Calibrated Fiscal Policies”, in A. Darbellay, N. Gaillard, and M. Waibel (Eds), Globalization and High Public Debt – The Impact of Financial Interdependence, Routledge, 2026.
[1] https://www.aft.gouv.fr/en/communiques-de-presse/archives
[2] The exposure of top three systemic banks to French government bonds reaches $60 billion.
[3] Recall that debt is sustainable when a borrower is expected to be able to continue servicing its debts without an unrealistically large correction to its income and expenditure.
To contact or read more of his work, visit https://www.norbertgaillard.com
Purchase or learn more about Norbert’s book, Globalization and High Public Debt – The Impact of Financial Interdependence (Routledge, 2026, https://www.routledge.com/Globalization-and-High-Public-Debt-The-Impact-of-Financial-Interdependence/Darbellay-Gaillard-Waibel/p/book/9781032949178)
David values thoughtful, reasoned, constructive responses from readers. To contact him, please send an email. The subject line should read “Response to [title of commentary].”
The complete Kotok Report archive can be found at www.kotokreport.com.
Disclosure:
The information posted on this website (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of David R. Kotok. David R. Kotok is an independent contractor. He may independently receive payments from various entities for consulting, advisory and board functions, speaking fees, book royalties, advertisements in affiliated podcasts, blogs, and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship, or recommendation thereof, or any affiliation therewith, by the Content Creator or by David R. Kotok.
Nothing on this website constitutes investment advice. It should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by David R. Kotok. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information.
This content, which may contain security-related opinions and/or information, is provided for informational purposes only. Do not rely upon it in any manner as investment advice. It is not an endorsement of any practices, products or services. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.
Any charts provided here are for informational purposes only and should not be relied upon when making any investment decision. As always please remember investing involves risk and possible loss. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts has been obtained from third-party sources believed to be reliable; however, David R. Kotok makes no representations about the accuracy of the information.
