Fall of yet another premier will make it hard for France to fix its finances. What’s behind its debt problem?

By Ana Nicolaci da Costa, CNN

London (CNN) — France lost its fifth prime minister in less than two years this week, just before the 2026 budget was due to be sent to parliament.

Sébastien Lecornu resigned Monday after announcing a cabinet that largely retained the same ministers as under his unpopular predecessor, triggering a backlash. François Bayrou quit last month after trying to push through a savings plan that included scrapping two public holidays and freezing public spending.

Lecornu’s resignation raised doubts over whether the 2026 budget – including much-needed debt-cutting reforms – can be passed in time. But after talking to lawmakers from a number of parties, he provided some reassurance Wednesday, acting in a caretaker capacity. “There is a willingness for France to have a budget before December 31,” he said.

France is Europe’s biggest spender relative to its economic output. Its debt burden is behind only those of Greece and Italy, which were at the heart of the European debt crisis in 2011.

When measured by budget deficit – the gap between government spending and revenue – France is also among the most spendthrift in the European Union, according to Eurostat, the bloc’s statistics office.

Although the country has a long history of hefty overspending, since June last year bond investors have become more worried about its finances, resulting in higher borrowing costs for the already cash-strapped government.

Here’s what’s behind the recent political and market turmoil over France’s debt.

How France spends its – and creditors’ – money

By far the biggest strain on the French public purse comes from what is known as social protection, which covers pension payments, unemployment benefits and other outlays. The country’s spending on social protection – at 23.3% of gross domestic product – is the second-highest in the EU, behind only Finland’s, according to Eurostat.

This type of spending in France is also liberal by global standards. Based on data from the Organisation for Economic Co-operation and Development (OECD), which uses different methodology from Eurostat, the country allocated the equivalent of 30.6% of its GDP to social protection last year, far above the 19.8% spent by the United States, for example.

State pensions make up a large share of France’s social expenditure. They are generous by developed country standards and available from an earlier age than in many other rich economies.

Beyond the more traditional spending on pensions and health care, the government also funds some unusual benefits. For example, it provides financial support to families employing a childcare worker or a nanny for children under six, according to Business France, a national agency that helps foreign companies set up in the country.

“We do reimburse a lot of things that we basically can no longer afford to reimburse,” Alexandra Roulet, an economics professor at business school INSEAD and a former economic adviser to French President Emmanuel Macron, told CNN.

The authorities’ response to two back-to-back crises in recent years has also contributed to the country’s debt load. The government spent heavily to protect households and businesses from the fallout of the Covid-19 pandemic and the spike in energy prices triggered by Russia’s invasion of Ukraine in 2022.

What’s the way forward?

France’s politicians are deeply divided on whether the solution is to rein in spending or raise taxes, particularly as taxes are already high. The country’s revenue from tax and social contributions totaled 45.6% of its GDP in 2023 – the highest percentage in the EU.

Agreeing on a deficit-reducing budget has also been difficult against the backdrop of mass protests against austerity measures.

Take the government’s attempt earlier this year to reduce its generous health care spending: Its proposal to cut the amount the state compensates taxi drivers for transporting certain patients to and from doctor’s appointments was met with protests.

A move by the government in 2023 to force through pension reforms that will push up the retirement age from 62 to 64 by 2030 also triggered widespread protests, though they still came into law.

Since Macron came to power in 2017, public anger has been amplified by tax cuts for businesses and the removal of the wealth tax implemented early on in his presidency. Combined with his plans for an eco-friendly tax hike on gasoline, those measures fueled a view of him as the “president of the rich” – an image he has struggled to shake off.

‘Political paralysis’

France’s debt burden is among the highest in the developed world: It stood at 116.5% of its GDP in 2023, compared with 122.9% in the US, according to the OECD.

Based on benchmark 10-year government bonds, investors now consider the EU’s second-largest economy a riskier borrower than Greece, Italy, Portugal and Spain – which were all at the center of Europe’s 2011 debt crisis.

The main reason for this market uproar lies in France’s inability to move forward with repairs to public finances. The stall in policymaking can be traced back to June 2024, when Macron dissolved parliament and called a snap election, a gamble that saw his party lose seats and splintered the National Assembly

“Ever since Macron dissolved parliament, resulting in political paralysis, France has been the weak link in the eurozone,” Holger Schmieding, chief economist at the Berenberg bank, told CNN, referring to the group of 20 countries that use the euro.

The recent rise in France’s borrowing costs compared with those of Italy is particularly striking. Italy, the EU’s third-largest economy, has a bigger debt load and weaker economic growth.

However, Italy is governed by a coalition that enjoys a comfortable parliamentary majority and which has taken steps to reduce the country’s budget deficit.

“If you look at its political situation now… it does actually look pretty stable,” Andrew Kenningham, chief Europe economist at consultancy Capital Economics, told CNN. “So that’s why – even before the recent resignation of yet another prime minister – France has become more of a focus of concern than Italy.”

So far, analysts do not expect another European debt crisis, this time centering on France.

But French borrowing costs could jump if candidates from the extreme right or extreme left win the next presidential election, currently due in 2027, Kenningham said.

“If (Marine) Le Pen comes in or let alone (Jean-Luc) Melenchon from the left-wing party… and if they were to actually implement even half of what they’ve said they want to do, then sure, you could get a sort of freak-out moment in the bond markets,” he said.

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Olesya Dmitracova contributed to this article.