France was counting on 0.7% growth. It will settle for less — and the gap becomes a debt problem

On September 10th France's national statistics office, INSEE, cut its forecast for growth this year to 0.4%, barely better than a flatline, blaming declining purchasing power and firms shelving investment. The government, which was still predicting 0.7% in July, is expected to shave its own number even further days before it submits the 2027 budget to parliament.

A growth miss is usually a footnote. In France it is the visible turn of a larger, slower mechanism. The country does not have the luxury of a mediocre year. Its public debt has already passed €3.5 trillion and stands near 115% of GDP, a record; the IMF expects it to climb above 120% and stay there through 2030. Yet its government, a minority administration ruling over a hung parliament, is now preparing to abandon next year's deficit target rather than fight for it. The trouble is that the two trends — shrinking growth and climbing debt — reinforce each other in a way French politicians seem unwilling, or unable, to stop.

A compounding problem, courtesy of arithmetic

The deficit remains stuck at about 5% of GDP, and debt service is the part most worth watching. The 10-year government bond now yields close to 4.4%, its highest in almost two decades, and about a percentage point more than a year ago. Debt that large at rates that high means a country's interest bill can grow faster than its economy. France is not there yet — the average maturity of its stock is long and much of the old debt carries cheaper coupons — but the market is pricing the moment when cheap debt rolls over into expensive debt.

The arithmetic is unforgiving. A country's debt ratio climbs when its deficit and its interest costs together outpace the growth of the economy. France runs a primary deficit — it borrows to pay for its day-to-day spending before interest is even counted — and adds roughly five points of debt a year on top of that. With a growth number of 0.4%, the denominator is barely moving. IMF projections of debt above 120% through 2030 are not a forecast of catastrophe; they are simply what happens when a five-point deficit meets a near-zero growth rate and an upward-drifting borrowing cost. Each downward growth revision nudges the deficit ratio up and the end-date of consolidation out.

A politics that postpones the reckoning

The reason France cannot stop this is not economic; it is institutional. The snap election of 2024 left a parliament with no working majority, and successive minority governments have had to pass budgets using a constitutional override, Article 49.3, that bypasses a vote. A presidential election in April and May next year makes every party's incentives worse: the left led by Jean-Luc Mélenchon is already preparing a no-confidence vote, and rivals see little reason to hand an unpopular successor an easy fiscal year.

The government's response has been to shrink the ambition, not the deficit. Earlier this year it planned to nudge the deficit below 5% — the target had been set at 4.9% — but in late August it dropped the goal, with the finance minister declaring a "stable" public deficit to be the aim of next year's budget instead. It is exploring only a partial freeze on pensions, which are politically safer to touch than most public spending, and it rules out tax increases. The prime minister wants a "minimalist" budget passed in time to avoid a third consecutive year starting with a stopgap "special law", which the budget watchdog warns would push the deficit up by at least half a percentage point and freeze investment and planned defence spending. In other words, the realistic choice on offer is not between consolidation and drift; it is between drift now and a worse drift later.

What the markets have already noticed

None of this is secret to bond investors. The gap between French and German 10-year yields, the standard measure of how much extra investors demand to hold French debt, has widened to roughly 85 basis points, and one forecast already has it above 100 by next spring. Analysts talk of a "rating crossover", in which the benchmark safe-haven status of a core euro-zone borrower quietly erodes. The Banque de France's governor insists the country is "not in catastrophic danger" — the situation, he concedes, is "worrisome and unsatisfactory".

For a US retail investor the transmission is indirect but real. France's government is the benchmark against which European corporate borrowing and much of the region's "risk-free" investing is priced; a sustained rise in its borrowing cost flows through to the stock of French banks, to the broader European equity funds many individual portfolios hold, and to global long-duration bonds. Americans have already been trimming direct exposure — the main US-listed France ETF has seen net outflows of roughly $49m this year, though it is a small fund against the wider market.

The temptation is to read this as a euro-zone debt crisis in the making. It is not, and the distinction matters. France borrows in its own currency, its banks are domestic, and the European Central Bank stands behind the system, whatever its internal politics. The risk is slower and less cinematic: a core borrower whose rating, spreads and market standing are repriced downwards over years, because each elected government passes the arithmetic to the next one. France has postponed its reckoning several times already. The market that finances the postponement is now charging more for the privilege.