Via ZeroHedge, September 1:
The French debt crisis reminds us that gradualism never works, that statism always ends in ruin and that those countries that bet on more government and higher taxes always end in stagnation, risk of default and social unrest.
France’s government debt-to-GDP exceeds 114%. However, unfunded committed pension liabilities reach 400% of GDP, according to Eurostat. The fiscal deficit announced for this year is 5.4%, but market consensus maintains an expectation of 5.8%. The five-year credit default risk has risen by 20% in twelve months. The yield on French two-year debt exceeds that of Spain, Italy, and Greece, and its risk premium to Germany has reached 80 basis points—20 above that of Spain.
The problem in the euro area is that all the mainstream claps when a government inflates GDP with massive government spending and public sector jobs as well as immigration, disguising persistent fiscal imbalances and declining productivity growth. Furthermore, Keynesian analysts ignore the crowding out of the private sector and the harmful impact of high taxes on long-term public accounts’ sustainability.
I am old enough to remember when the mainstream media hailed Greece as the engine of growth in the eurozone when it was bloating GDP with massive government spending and public sector jobs. Greece was hailed as “safeguarding high economic growth” and “leading the euro area recovery” in 2005 and 2006 by the IMF and the European Commission publications. Headlines and policy reports widely acknowledged Greece’s economic achievements as an example of strong leadership within the euro area. We all know what happened in 2008.
We cannot forget that the European Central Bank has been instrumental in creating the perverse incentives for politicians to maintain and increase elevated spending and fiscal imbalances.
The European Central Bank (ECB) has, over the past decade, deployed a policy toolkit of unprecedented scale—including repeated rate cuts, negative nominal rates, the controversial anti-fragmentation tool, and de facto debt monetisation—designed to safeguard the eurozone’s stability. Yet, for all the rhetoric of stability and independence, these measures have created powerful incentives for fiscal recklessness, eroding the very foundations of European monetary credibility and planting the seeds of today’s sovereign debt crises, including the current French debt debacle.
ECB policy rates, once anchored to discipline both sovereign and private borrowing, have plummeted from above 4% in 2008 to negative territory and have remained in negative real territory for years. Furthermore, the ECB’s asset purchase programmes, expanded during crises under initiatives like the Pandemic Emergency Purchase Programme (PEPP) and the Outright Monetary Transactions (OMT), have saturated bond markets with central bank money and generated an enormous crowding-out effect that penalises credit to families and businesses and disguises solvency issues of public sector issuers.
The anti-fragmentation tool, designed to contain the “spread” between the core and periphery country bonds, takes this issue further: by promising open-ended intervention, the ECB reassures markets that it will backstop sovereign debt at virtually any price, diluting the discipline that risk premia once imposed on profligate governments. In fact, it could be considered a pro-squandering tool, as it benefits those countries with poor fiscal compliance and penalises those who reign in debt and deficits.
While these interventions immediately calm markets, they foster a mindset of indifference in governments, leading them to consistently increase their spending. Thus, many governments, like Spain’s, brag about the low interest rates and spread of their debt despite rising imbalances and worsening public accounts. The anti-fragmentation tool and negative nominal rates destroy the market mechanism that should serve as an essential warning for reckless fiscal policy. Member states, assured of cheap funding and endless ECB support, have little incentive to reform bloated budgets or contain deficits, especially when electorally costly. The persistent threat warned by German policymakers, that ECB actions are subsidising “fiscal freeloading” in high-debt member states, is becoming a reality.
The most dramatic case is France. The French government’s debt has soared above 114% of GDP in 2025, driven in part by persistent large deficits covered cheaply under the ECB’s umbrella. Attempts at fiscal consolidation have always been timid and thus have failed to achieve lasting discipline, with ECB support always in the background as a failsafe. The result is a mounting sovereign risk premium: French bonds, for the first time in modern euro history, now yield more than comparably rated Spanish, Greek, or Italian bonds, signalling the market’s discomfort with France’s debt trajectory even in the age of ECB backstops. The fact that this rise in spreads happens in the middle of a large stimulus plan (Next Generation EU) and rate cuts is even more alarming....
....MUCH MORE
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