France’s student protests highlight a debt crisis that could spill over to the rest of Europe

By Hanna Ziady, CNN

London (CNN) — France’s unprecedented wave of student protests has laid bare the country’s growing financial pressures, which will only become more difficult to tackle as Europe’s second-largest economy tries to rein in a ballooning budget deficit.

The country’s finances are in a precarious state. Public debt was more than $4 trillion in June, exceeding the size of the economy, according to the country’s statistics agency. The cost of servicing that debt has climbed by billions of dollars on last year, as bond yields spike.

At the same time, demands on the public purse are rising: Pension costs have climbed because of an aging population while the government looks to spend more on defense.

High school students, meanwhile, have called for a fix to staff shortages, overcrowded classrooms and crumbling school infrastructure.

Solutions to France’s financial troubles have led to social unrest in the past. Efforts to raise the retirement age sparked widespread protests in 2023.

Last week, the French government proposed deep spending cuts and tax hikes aimed at narrowing the budget deficit, but bond buyers are concerned that fiscal measures may be watered down by lawmakers ahead of presidential elections next year, said Andrew Kenningham, chief European economist at consultancy Capital Economics.

The election could see President Emmanuel Macron ousted by either a far-right or far-left successor, raising questions over the country’s commitment to fiscal discipline. While Marine Le Pen’s right-wing National Rally recently proposed substantial spending cuts meant to stabilize the public finances, her party also remains committed to costly tax reductions, Kenningham said.

“Investors will also be concerned about greater fiscal populism after the elections,” he wrote in a note last week. “There is a big risk that spreads rise a lot further, either before or after next year’s elections.”

Bond yield blowout

Worries about a potential debt crisis in France boiled over last week, leading to a selloff in French bonds and a sharp rise in yields.

The spread between French and German bond yields expanded to its widest level since 2012. That difference in yields means investors are demanding much higher returns to hold debt from France compared with Germany, which is deemed a safer alternative.

The French bond rout has sparked fears of spillovers to other high-yield European debt markets, with some analysts drawing parallels with the eurozone debt crisis of the early 2010s.

Given France’s size and systemic importance, “the potential for contagion into other countries and the Eurozone at large is very large and could potentially cause a serious crisis for the entire region,” Angel Talavera, chief European economist at Oxford Economics, an advisory firm, told CNN.

These worries in large part pushed the euro to its weakest level against the dollar since May 2025 on Monday. The currency, shared by 21 countries in the European Union, is worth around $1.12, having briefly dipped below that level.

Beyond France, risks loom large

The latest ructions in markets could weigh on a fragile economic recovery in Europe, bolstered by investment into artificial intelligence, stronger demand for European exports and higher defense spending in Germany.

Recent survey data showed that activity in manufacturing and services in the euro area increased at its fastest pace in nearly three-and-a-half years last month.

“(Economic) growth is staging a comeback and Europe has shown surprising resilience,” economists at Morgan Stanley wrote in a late September note.

High bond yields are a clear risk to that growth, however.

If governments don’t cut spending, “interest rates will continue to go up,” Carsten Brzeski, head of macroeconomics at Dutch bank ING told CNN.

Higher bond yields push up the cost of borrowing throughout the economy, making home and car purchases more expensive and driving down investment. They also make it more expensive for governments to borrow money and force a certain degree of austerity to stop yields from rising further.

Yields on French, German and UK government bonds have broken multi-year records in recent weeks as concerns mount about the sustainability of public debt loads.

Europe’s public finances pose “serious risks to eurozone financial markets and to the economy,” Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, told CNN.

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