Paul Krugman warns France's fiscal crisis poses eurozone threat

What Paul Krugman said about France's debt

Nobel laureate Paul Krugman has warned that France is on a "fiscally unsustainable path" that could spark an explosive sovereign debt crisis across the eurozone. Writing on his Substack blog, the economist said France risks becoming "too big to save" as large budget deficits and rising interest costs push its government debt ratio ever higher.

Krugman pointed to France's failure to address its relatively low retirement age alongside an ageing population as a central vulnerability. Because France relies on the euro, he argued, a loss of market confidence could rapidly trigger a vicious cycle reminiscent of the sovereign debt crisis that destabilised Greece, Portugal, Spain and Italy between 2009 and 2012.

"First, investors stop buying a euro-area nation's bonds, raising the specter that the government will be forced into default because it simply doesn't have the cash to pay interest and principal on its debt," Krugman wrote. Fear of default drives further capital flight, driving interest rates up and deepening the panic. He added that bailing out France would be "extremely expensive" for the European Central Bank and politically contentious as long as Paris moves further away from fiscal responsibility.

How Jean-Claude Trichet responded

Former ECB chief Jean-Claude Trichet responded to the warnings on Friday by urging French politicians across the spectrum to compromise and deliver credible deficit cuts. Speaking to CNBC, Trichet said the burden lies with the French government and parliament to reassure international investors.

"All political sensitivities, whatever they are, they have to understand that it is about time to prove that France, the market player, that they are responsible," said Trichet, who headed the ECB from 2004 to 2011 and previously served as governor of the Banque de France.

Trichet noted that the eurozone has effective backstops, including the European Stability Mechanism and the ECB's Transmission Protection Instrument (TPI) — a mechanism introduced in 2022 to counter market fragmentation. However, activating such tools requires France to ask for help and show it is taking real action itself. "You first have to help yourself, because we cannot win if you are not yourself convincing market participants, investors, and savers that you are credible," Trichet said.

What happens next for France

The French government currently maintains that emergency support from European institutions is not needed. Yet with political tension rising ahead of the next presidential election, achieving parliamentary agreement on major spending cuts or pension changes will be difficult.

Unless French lawmakers can deliver a convincing plan to rein in borrowing, financial markets may continue to demand higher yields on French sovereign bonds, raising borrowing costs for Europe's second-largest economy.