The French Political Crisis That's Turning Into a Debt Crisis

France has become the eurozone’s main source of concern, despite markets not reacting to a new fiscal-policy surprise: the announced budget broadly matched expectations. The deeper risk is political. France has not run a budget surplus in more than 50 years and, since the 2024 elections, has lacked a parliamentary majority, raising doubts that it can pass a credible budget or sustain fiscal adjustment. By 2027, the country could still lack both a president and a parliament able to agree on a plan.

The election outlook makes a stable, Italy-style resolution less certain. Centrist candidates have weakened in first-round polling and generally lose projected second-round matchups to Marine Le Pen; a Le Pen–Jean-Luc Mélenchon runoff is now seen as the likeliest scenario, with polls favoring Le Pen. But a presidential victory would not guarantee a parliamentary majority. A Le Pen presidency alongside a Mélenchon-dominated parliament could leave France ungovernable or force an unlikely far-right–far-left compromise. Shaheen Vallee doubts Mélenchon will become president but warns that confrontation remains possible.

Le Pen’s October 6 proposal for a constitutional fiscal rule is strict on paper: it would bring the deficit roughly halfway toward the debt-stabilizing level almost immediately, require adjustment of at least 0.5% of GDP until debt fell to 60% of GDP, and let the constitutional court block non-compliant budgets. An emergency exception would need three-fifths of parliament and could last only two years without referendum approval. Yet Le Pen has not specified the measures needed to meet the targets, including substantial pension reform. Her commitment to social spending and pensioners conflicts with adjustment, while Jordan Bardella has signaled greater fiscal orthodoxy, including possible support for raising the pension age. Le Pen may ultimately have to disappoint voters or markets, perhaps by restoring it to 65 or higher.

Mélenchon has proposed cancelling the roughly 20% of French debt he says is owed to the Banque de France, later describing this as asking the ECB to roll it over indefinitely. Central-bank governor Emmanuel Moulin warned that France risked being “strangled by its debt” without adjustment and said indefinite rollovers would breach European treaties. Mélenchon called the remarks a betrayal and threatened Moulin with a high-treason trial. Vallee compares La France Insoumise’s debt arguments with Yanis Varoufakis’s stance during the Greek crisis, when confrontation with the Eurogroup and ECB ended badly. Mélenchon could win support by opposing adjustment but then be unable to deliver his proposals; he is also campaigning, more quietly, to restore the pension age to 60.

France’s banks hold relatively little government debt compared with Italian or Spanish banks, so one speaker sees no active sovereign-bank doom loop. They could add €300–400 billion of French government debt and still reach only the exposure level of Italian banks. The 2011 stress on French banks was driven chiefly by a scramble for dollars after US money-market funds stopped financing European banks, and the speaker says the system is now less exposed to that funding risk. The euro area has established lending facilities and banking-union tools to contain sovereign and bank stress, but ECB support is conditional: OMT requires an ESM program and credible fiscal path, while TPI does not require a program but still depends on compliance with European fiscal rules and credible medium-term adjustment.

The ECB could stabilize French debt quickly, but intervention without durable fiscal consolidation is unlikely, and support would carry political costs in other countries, especially Germany. Meaningful adjustment may require pension reform and restoring some form of wealth tax. A former Macron campaign adviser called the 2017 abolition of the wealth tax an economic and symbolic mistake; the speaker says it helped portray Macron as “the president of the rich,” weakening support for later reforms, including pensions. France may restore at least the earlier wealth tax, though the speaker doubts it will adopt Gabriel Zucman’s more aggressive proposal. Jean Vallet sees the necessary tools as within reach but no clear catalyst before the elections, and argues that cross-party agreement on a debt rule for the next decade could help build the political consensus now missing.