Paris cannot outsource fiscal discipline to Frankfurt.
Emmanuel Moulin, Governor of the Bank of France, issued a stark warning on Friday, September 25: France must do “everything possible to avoid a sovereign debt crisis” ahead of the 2027 presidential elections. Most importantly, because “it would be misguided to expect the European Central Bank to ride to the rescue.”
This warning came in response to a question as Moulin faced the French Senate: If Paris struggles to fund itself, will Frankfurt step in? The governor’s answer was that the premise reflected flawed reasoning.
Moulin’s logic was simple: the European Central Bank (ECB), which sits in Frankfurt, has crisis mechanisms in place for the failure of national governments within the European Union to resolve their debt crises provided they have acted first. Moulin was not being pessimistic; he was simply restating the terms of the contract that exists between Paris and Frankfurt. The tools to close a deficit sit with governments and parliaments.
But Governor Moulin’s comment should be a wake-up call for France: its 10-year borrowing costs have reached 4.7%, which is the highest since the 2008 financial crisis. The premium over German Bunds has passed one percentage point for the first time since 2012, and investors now demand more to lend to Paris than to Rome or Athens—a grim reality for a nation that proved resilient in the years following 2008.
At the Treasury’s September auction, the 10-year cost cleared at 4.23%, against 3.45% in February, before fuel costs skyrocketed and the ECB did a 180-degree turn as they retreated from expected rate cuts and looked instead to rate rises. But France should be wary before attributing all of this to the global economy alone.
France is still able to borrow without difficulty, but the danger is a slow burn, and not one that will arrive immediately. Debt interest alone is expected to reach €65 billion (over $73 billion) before the end of 2026, now the largest single item of state spending; every bond that was issued in the decade of quantitative easing, at near-zero interest rates, must now be refinanced at several times the cost.
Public debt, meanwhile, is projected at 119.3% of GDP this year, and 121.7% in 2027, while the economy contracted in Q1 2026, and remained stagnant in Q2. Moulin used a specific phrase when discussing the issue—a “gradual stranglehold”—and it hit the mark exactly. Fiscal crises in rich democracies rarely begin with a failed auction, but with a budget in which debt service eclipses all other expenditures.
The vulnerability of the situation is sharpened by the fact that roughly half of France’s debt is owned by nonresidents. In comparison, around 70% of Italy’s sovereign debt is with domestic holders. This is a perfectly reasonable lending strategy in times of growth; but as the election looms, candidates will need to balance domestic priorities with appealing to international creditors.
The Transmission Protection Instrument (TPI) at the ECB exists to help national governments avoid a debt crisis, but it has specific conditions. Permitting bond purchases to counter disorderly markets, eligibility for the TPI depends on compliance with EU fiscal rules—approaching 150 basis points to trigger—with one strategist calling it the “nuclear solution.” One analysis puts France’s spread at between 100 and 125 basis points, and doubts the ECB will intervene while it remains focused on inflation. Markets are anticipating at least one further rate rise before the end of the fiscal year.
France does not need to look too far abroad or too far into the past to see what happens if the limit is breached; Italy learned the terms in August 2011. With its spread reaching 390 basis points, Rome received a confidential letter from Jean-Claude Trichet and Mario Draghi setting out the reforms expected by the ECB; eight days later, the government, then headed by Silvio Berlusconi, brought forward its balanced-budget target; three days after that, the ECB began buying Italian debt. Within months, Berlusconi had given way to Mario Monti’s emergency government.
Paris faces the same fate without a government obviously able to pay it. Sébastien Lecornu’s minority administration will present a 2027 budget seeking €54 billion ($61 billion) in savings, aiming for a deficit of 5% of GDP, or 4.8% excluding defense. Lecornu has insisted that France is a “long way from austerity,” which is more of a political statement than a financial one: fuel costs are at record highs, and the gilets jaunes (yellow vest) protests that rocked France for months are feared to make a comeback.
Two of Lecornu’s predecessors fell as a result of failed budgets, and Lecornu passed this year’s budget only through a constitutional clause that allowed him to bypass a parliamentary vote. But with the election on the horizon, opposition parties are hardening their stances and drawing up their positions, meaning that the next budget will reach a chamber with even starker political divisions.
Jean-Luc Mélenchon, France’s left-populist candidate and among the frontrunners to become president, proposed canceling the 18% of French debt held by the Bank of France. Moulin shut this down pretty quickly, calling it “illegal, dangerous, and useless,” with France not having defaulted since 1797 prior to the Revolution, while Olivier Blanchard pointed out that it would be the state canceling a claim on itself, for a net effect of zero.
But what underpins Mélenchon’s proposal and the bond market’s premium is the assumption that the ECB is the variable in France’s fiscal question. Moulin has tried to dispel this, insisting that the only term that can move is the one voters control—effectively telling voters that nobody else is coming to rescue France economically.
