Nobel Prize-winning economist Paul Krugman warned that France’s deteriorating public finances are on an "unsustainble path" and at risk of unleashing a debt crisis across the euro area. He wrote in a Substack post dated Oct. 8 that France’s membership in the euro area creates the possibility of an explosive debt crisis that could be destructive to European unity. Krugman’s post follows a sharp selloff in French government debt in recent months, triggered by fears of a new inflation wave and fueled by concerns over the country’s large budget deficit and polarized politics.
The premium investors require to own French 10-year bonds over their German equivalents has climbed to levels last seen in the crisis of 2011 and 2012. At €3.6 trillion ($4 trillion), or 119% of GDP, France’s debt is the highest since the birth of the euro. Yet the government continues to add to the burden, and its lack of fiscal responsibility means other euro-area members would likely resist offering a bailout, which would be extremely expensive given the size of the economy.
France may have crossed the line from too big to fail to too big to save, Krugman added. European Central Bank President Christine Lagarde told euro-area finance ministers that officials are paying attention to financial markets and have the tools to counter unwarranted, disorderly moves. French Finance Minister Roland Lescure said the country is far from needing the ECB to step in.
French bonds gained on Friday, sending the 10-year yield three basis points lower to 4.86%. Krugman noted France stands out due to its persistent inability to get realistic about retirement, with people drawing pensions earlier than anywhere else in western Europe. Marine Le Pen has pledged to enable some workers to retire as early as 60.
Meanwhile, students across France are rioting over a lack of teachers, overcrowding and crumbling school buildings. Krugman said the implied probability of France being unable to pay its debts, based on credit default swaps pricing, is minimal at 1.2% but "too low," and the sudden rise of the current CDS price on French government bonds is very worrying.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing