France is on fire, and it faces a political and an economic reckoning that feels dangerously familiar to Americans.
The country is nearing a fiscal crisis, because it spent more than it can afford to pay back. The bill is coming due much faster than expected after bond rates surged in recent months, boosted by rising energy costs. Raising taxes and reducing government spending are part of a potential solution, but those would be politically unpopular decisions that could risk further angering an already livid public. Any workable solution faces a steep climb in an uncertain budget battle in a sharply divided government.
Does that ring a bell?
A growing number of countries are facing struggles similar to France’s — in particular, the United Kingdom — where rapidly growing debt, surging costs to finance that borrowing and insufficient political will to make the uncomfortable decisions to solve the problem are the story of Western economics right now. That includes the United States.
But similarities can be superficial.
France’s financial stress is particularly acute. The risk of contagion throughout Europe is low. France’s enormous public safety net represents a much larger share of government spending than that in the United States. And the unique dynamics of the American economy means the United States faces no imminent danger of becoming the next France.
These are not new problems: Europe’s social safety net has been on an unsustainable path for decades, and economists and some politicians have warned for years that the bill would eventually come due.
But they’re getting worse. The Iran war exacerbated the West’s fiscal problems.
Since February, the G7 economies’ average 10-year government bond yield grew more than 1 percentage point, reaching the highest level in nearly 20 years, the International Monetary Fund reported last week.
By the end of the decade, those seven economies’ public debt loads are expected to collectively exceed their economic production, the IMF predicts. That would be the first time since World War II.
France’s public debt is around 119% of its GDP, double the European Union’s target, and its annual budget deficit is 5.4% of its gross domestic product.
“In Europe, people are increasingly scared of the bond market and the interest rates that governments need to pay to borrow,” said Peter Taylor-Gooby, a social policy professor at the University of Kent. “It’s come to a point where you can’t ignore it anymore. If we do, we’ll reach a serious crisis.”
On paper, America doesn’t look dissimilar: Its $32 trillion public debt is roughly equal to annual US GDP, and the $2 trillion budget deficit that it just closed the books on is more than 6% of GDP. The cost to finance America’s public debt just crossed $1 trillion a year, an astounding 14% of the total federal budget.
In other words, one in every seven tax dollars is used just to pay interest on the amount of money the United States is borrowing.
But the serious conversations about cutting back on spending and raising taxes taking place in Europe are considerably less serious in the United States. So why isn’t the United States facing the same problems as France?
The United States’ biggest advantage is that it prints the world’s reserve currency. The majority of global transactions are conducted in US dollars, including key commodities like oil and gold.
Demand for dollars remains robust in large part because they’re considered safe: The United States’ transparency and commitment to the rule of law make the dollar the cornerstone of the global financial system — even if some of the shine has worn off over the past decade.
That also fuels demand for US Treasuries, widely considered the safest of safe-haven assets. Even in the midst of a global government bond sell-off, US bond rates remain lower than those of other Western economies. And when stocks went on a skid last week, investors were unafraid to turn to their traditional place of refuge, sending Treasury yields sharply lower in the process.
But the difference between France and the United States really comes down to one thing. As James Carville said: It’s the economy, stupid.
The United States also has a uniquely large and diverse economy that is far less susceptible to shocks than many of its smaller peers. AI in particular is producing an investment boom in the United States that is lifting the economy when several other sectors appear to be stagnating or in decline.
One key way to make deficits less relevant is to keep the economy growing strong. That makes the debt look puny by comparison.
So countries need to ask: What is the rate we’re paying — and is it sustainable for us to keep paying it based on our expected economic growth?”
“France and the UK are pretty close,” noted Mark Zandi, chief economist at Moody’s Analytics. “But in the US, AI’s contributions to growth make it more likely we’ll manage our debts and navigate it much more gracefully.”
Economists warn: Don’t confuse the lack of a looming debt crisis in the United States with fiscal responsibility. It’s just that it can handle the problem better than France or the UK.
“That doesn’t mean we should take any solace in that,” added Zandi. “We’re just in a different place.”
Any time a European country faces a fiscal problem, it raises concerns about a contagion that could spread across the continent. But economists widely view France’s problems as contained within the country.
The European Central Bank has signaled it would not need to intervene in France’s fiscal situation. But it could if it had to, and it is well-positioned to buy up a bunch of bonds of its member countries to limit any potential contagion effects, noted Andrew Kenningham, chief Europe economist at Capital Economics.
Other European economies’ deficits are also much smaller by comparison. Some are expected to run surpluses this year.
And French political parties across the left and right have said they want to remain with the European Union — including French presidential frontrunner Marine Le Pen, a far-right candidate who once championed “Frexit” but has since backed off that pledge. Although Germany’s AfD party has advocated leaving the EU, it isn’t close to forming a government yet, Kenningham noted.
But an X factor could lead to a debt crisis outside France: the US “X date.” At some point next year, the United States will hit its debt ceiling again, and the new Congress will need to negotiate with President Donald Trump to raise it — a political football that could be particularly challenged by a lame duck president and a potentially Democratic-controlled Congress less willing to give in.
A failure to raise the debt ceiling threatens to force the United States to manufacture a default on its debt, even if it otherwise would be able to pay.
“You could construct a scenario in which we breach the debt limit by Halloween next year,” said Zandi. “And then you’ve got other issues.”