The France and USA Rating | Erosion of Creditworthiness: When the Debt Crisis of Democratic Nations Accelerates

The United States loses its AAA credit rating from all major rating agencies after almost a century – France becomes the European epicenter of a debt crisis

The recent downgrades of the United States and France's credit ratings by the leading rating agencies mark a historic turning point in the global financial landscape. In October 2025, the German rating agency Scope downgraded the United States from AA to AA-, marking the first time in history that all three major agencies—Moody's, Standard & Poor's, and Fitch—withdrew their top credit ratings from the United States. Almost simultaneously, the situation in France worsened dramatically when both Fitch and Standard & Poor's downgraded the credit rating of the Eurozone's second-largest economy. These parallel developments on both sides of the Atlantic reveal fundamental distortions in the public finances of developed democracies, the causes of which go far beyond mere debt-to-GDP ratios.

The significance of these events can hardly be overstated. The United States has been in a government shutdown caused by Republicans and Democrats since October 2025, which strikingly documents the dysfunctionality of the political system. National debt exceeded the $38 trillion mark for the first time in October 2025, with more than $1 trillion added between August and October alone—the fastest debt increase outside of the pandemic period. In France, in September 2025, the government of Prime Minister François Bayrou collapsed over an austerity budget that was intended to curb new borrowing, exposing political fragmentation and the impossibility of fiscal reform. These developments are not isolated phenomena, but symptoms of a profound crisis of confidence in the ability of Western democracies to meet their fiscal challenges.

An analysis of this dual debt crisis reveals a complex web of fiscal, institutional, and political factors. In the United States, it is not only the absolute debt levels of 124 percent of gross domestic product that drive rating agencies' decisions, but above all the structural inability of the political system to contain deficits. The Congressional Budget Office projects that the deficit will rise to an average of 7.8 percent of GDP by 2030, and the debt-to-GDP ratio will reach 140 percent. Interest costs on the national debt exceeded the $1 trillion mark for the first time in fiscal year 2025, surpassing spending on defense and Medicare. In France, the debt-to-GDP ratio is 114 percent, the deficit is between 5.4 and 5.8 percent, and political fragmentation is preventing any substantial reform efforts. The interest costs on French government debt reached €67 billion in 2025 and could rise to €100 billion by 2028 – more than all government ministries spend combined.

The downgrades by the rating agencies are more than just technical adjustments in the assessment of credit risk. They signal a fundamental shift in the perception of the sustainability of Western sovereign debt and reflect the realization that the political and institutional prerequisites for a return to sustainable public finances are increasingly eroding. Scope explicitly justified the US downgrade with the ongoing deterioration of public finances and a weakening of governance standards, particularly the erosion of established checks and balances and the increasing concentration of power in the executive branch, coupled with the legislative inability to act due to polarization. In France, the agencies cited political instability, growing polarization, and the improbability of reducing the budget deficit below three percent by 2029.

This analysis will examine the complex dimensions of this debt crisis in eight sections. It will trace the historical genesis of the current situation, analyze the fundamental drivers and market mechanisms, provide a data-driven assessment of the current situation, and examine the specific challenges in the US and France comparatively. It will then critically assess the economic, social, and systemic risks before outlining possible future scenarios and potential disruptions. It concludes with a synthesis of the strategic implications for decision-makers, investors, and the international financial architecture.

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How four decades of fiscal expansion and political shortsightedness have eroded the foundations of public debt

The current debt crisis in the United States and France is the result of long-term structural developments spanning several decades. In the United States, the transformation of fiscal policy began in the early 1980s under President Reagan, when a combination of tax cuts and increased military spending led to a structural increase in deficits. The debt ratio, which had reached a historic low of 31.8 percent of GDP in 1981, subsequently rose continuously. A brief period of consolidation in the late 1990s under President Clinton, when the United States benefited from the dividends of the Cold War and the technology boom, proved to be an exception to an otherwise consistent trend of rising debt.

The financial market crisis of 2008-2009 marked a qualitative leap in debt dynamics. The fiscal response to the Great Recession—including the $787 billion American Recovery and Reinvestment Act of 2009—drove the debt-to-GDP ratio from around 60 percent in 2007 to over 100 percent in 2012. While other developed economies undertook consolidation efforts in the following years, US fiscal policy remained expansionary. The COVID-19 pandemic led to another massive expansion of debt in 2020-2021, with the debt-to-GDP ratio briefly reaching 130 percent. Crucially, however, unlike previous crises, no substantial consolidation followed the pandemic. The One Big Beautiful Bill Act, passed in July 2025, dramatically worsened the situation by making the 2017 tax cuts permanent and introducing additional tax relief, which the Congressional Budget Office estimates will increase deficits by $3.4 trillion over 10 years—or $5.5 trillion if the temporary measures are extended.

The institutional framework for US fiscal policy has deteriorated in parallel with the rise in debt. The debt ceiling drama, which has regularly led to budget crises since the 2010s, illustrates the dysfunctional nature of the budget process. The increasing polarization between Republicans and Democrats has undermined Congress's ability to find consensual solutions to long-term fiscal challenges. The concentration of power in the executive branch, which rating agencies have explicitly identified as a governance problem, reflects a broader erosion of checks and balances in the American political system.

In France, fiscal development follows a different, but equally worrying, pattern. The French debt ratio was around 20 percent of GDP in 1980 and rose to around 55 percent by 1995. After the introduction of the euro in 1999, the ratio initially stabilized as France attempted to comply with the Maastricht criteria—albeit with repeated violations. Since 1999, France has failed to meet the deficit limit of three percent of GDP in most years. The financial market crisis of 2008-2009 drove the debt ratio above 80 percent, and a continuous upward trend has been observed since then. Unlike Germany, which pursued strict consolidation after the euro debt crisis and reduced its debt ratio from 81 percent in 2010 to below 65 percent, France has never reduced its debt.

The COVID-19 pandemic further exacerbated France's debt situation. The debt ratio reached 114 percent of GDP in 2024, and the absolute volume of debt exceeded €3.3 trillion—more than any other EU country. Particularly problematic is the structure of French government spending, which, at 57 percent of GDP, is among the highest in Europe, compared to 49.5 percent in Germany. This high spending reflects a generous welfare system, early retirement, and a bloated public sector. President Macron's attempts to push through structural reforms—particularly the controversial 2023 pension reform, which raised the retirement age from 62 to 64—met with massive political resistance and were ultimately suspended in October 2025.

France's political fragmentation intensified after the snap parliamentary elections in the summer of 2024, which split parliament into three blocs: the left-wing alliance, Macron's center-right coalition, and the far-right National Rally. None of these blocs possesses a governing majority, leading to a series of government crises. Within a year, France had five different prime ministers. The inability to reach consensus on an austerity budget led to the fall of the Bayrou government in September 2025, illustrating the system's structural incapacity for reform.

Historical developments in both countries show a common pattern: A combination of demographic change, growing social spending, insufficient tax revenues, political short-termism, and a lack of institutional mechanisms to enforce fiscal discipline has led to a continuous accumulation of debt. The lesson of the 2010-2012 European sovereign debt crisis—that high debt combined with political instability can lead to exponentially rising refinancing costs—has apparently not been internalized in either Washington or Paris.

Political fragmentation, demographic time bombs and the mechanisms of fiscal dominance

The analysis of the core factors driving the current debt crisis reveals a complex interplay of economic, demographic, and political dynamics. The focus is on the question of why democratic systems systematically fail to defend long-term fiscal sustainability against short-term political incentives.

The primary economic driver is the structural divergence between revenues and spending. In the United States, federal revenues will average about 18 percent of GDP over the next ten years, while spending will average 24 percent. This six-percentage-point gap cannot be explained by cyclical fluctuations but reflects fundamental structural imbalances. The One Big Beautiful Bill Act exacerbated this situation by implementing tax cuts worth $4.5 trillion over ten years, while spending cuts—primarily in Medicaid and social benefits—amount to only $1.4 trillion. The result is a structural primary deficit in which, even before interest payments, spending exceeds revenues.

The demographic component significantly exacerbates this dynamic. In the US, the baby boomer generation will retire in the next few years, which will dramatically increase spending on Social Security and Medicare. The Social Security Trust Fund is currently projected to be depleted in 2033, resulting in automatic benefit cuts of 23 percent if no legislative changes are made. The unfunded liabilities of Social Security and Medicare combined exceed $75 trillion over a 75-year horizon. This demographic time bomb is not reflected in official debt statistics because the US government is not legally obligated to pay future social benefits until they become due. This creates a fiscal illusion that systematically understates the true magnitude of long-term obligations.

In France, the demographic challenge is manifested in the structure of the pension system. With a retirement age of 62—compared to 67 in Germany and Italy and 66 to 67 in the United Kingdom—France has one of the most generous pension systems in Europe. The suspension in October 2025 of Macron's pension reform, which was intended to gradually raise the retirement age to 64, will cost the system an additional €1.8 billion by 2027. This decision, which was politically motivated to avoid another government crisis, illustrates the dominance of short-term political calculations over long-term fiscal needs.

The interest burden on existing debt has become a fiscal driver in its own right. For the first time, the United States paid over $1 trillion in interest on its national debt in fiscal year 2025—17 percent of total federal spending. These interest costs already exceed defense spending and, according to CBO projections, will rise to $1.8 trillion annually by 2035. The interest burden as a share of GDP will rise from 3.2 percent in 2025 to 4.1 percent in 2035, breaking historic records. A significant portion of the U.S. debt—over 20 percent—must be refinanced in fiscal year 2025, making the country highly vulnerable to interest rate changes.

Interest rate developments in France are particularly worrying. Yields on ten-year French government bonds rose from 3.20 percent in June 2025 to 3.49 percent in September 2025. For the first time since the euro crisis, France is paying higher interest rates than Italy, signaling a fundamental shift in the markets' risk perception. The yield premiums on French bonds over German Bunds—traditionally the safest haven in the eurozone—have risen dramatically. This development is particularly problematic given that France has financing needs of over €300 billion for 2026, including €175.8 billion for refinancing maturing debt.

The political incentive systems in both countries systematically favor short-term spending expansion over long-term consolidation. In the US, increasing party polarization has made any consensus on fiscal reform impossible. Republican politicians have positioned themselves against any tax increases, while Democratic politicians oppose spending cuts in social programs. The result is a political stalemate in which the only agreement is to postpone the problem until the next legislative session. The erosion of institutional norms—exemplified by repeated government shutdowns and debt ceiling crises—has fundamentally damaged the system's ability to fulfill basic governance functions.

In France, the fragmentation of the party system has made any stable majority formation impossible. The extreme wings—both left and right—have a veto over any reform attempts without offering constructive alternatives of their own. The result is a policy of the lowest common denominator, in which substantive reforms are systematically blocked. The fact that France has had five different prime ministers within a single year underscores the instability of the system.

The market mechanisms designed to discipline these developments are only partially effective. In theory, rising debt ratios should lead to higher risk premiums and interest rates, forcing governments to consolidate. In practice, however, the exceptionally low interest rates of the 2010s and the massive bond-buying programs of central banks have eliminated this disciplinary mechanism. The European Central Bank has created an explicit tool, its Transmission Protection Instrument, to limit yield spreads between eurozone countries, further weakening market discipline. In the United States, the Federal Reserve has had a similarly discipline-reducing effect through its bond-buying programs during and after the pandemic.

The interaction of these factors—structural deficits, demographic pressure, growing interest burdens, dysfunctional policymakers, and weakened market discipline—creates a self-reinforcing dynamic in which debt sustainability is increasingly eroding. Rating agencies have recognized this fundamental shift and responded with their downgrades.

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Interest costs eat up the budget: Consequences for the state and citizens – Image: Xpert.Digital

Deficit explosion, interest rate shock and the illusion of political action

The current fiscal situation of the United States and France can be precisely captured by a number of quantitative indicators that illustrate the extent of the structural challenges.

In the United States, the budget deficit reached $1.8 trillion, or 6.2 percent of GDP, in fiscal year 2025. This deficit is notable because it occurs despite relatively robust economic growth and low unemployment—conditions under which the deficit would have been historically significantly lower. The Congressional Budget Office projects that deficits will average 6.1 percent of GDP over the next decade, rising from $1.7 trillion in 2025 to $2.6 trillion in 2034. The debt-to-GDP ratio, measured as government debt as a percentage of GDP, is currently around 100 percent and is projected to rise to 118 percent by 2035—higher than at any time in U.S. history outside of World War II.

Gross national debt reached $38 trillion in October 2025, up from $37 trillion in August. This $1 trillion increase in just two months is partly due to catch-up effects from the debt ceiling crisis, but underscores the rapid acceleration of debt dynamics. Per capita debt now stands at $109,000 for each of the 347 million inhabitants. The trend in interest costs is particularly worrying. In fiscal year 2025, interest expenditures exceeded $1 trillion for the first time, accounting for 17 percent of total spending. By comparison, defense spending was approximately $900 billion, and Medicare approximately $700 billion.

The composition of spending highlights the structural constraints. Social Security will cost approximately $1.5 trillion in 2025, Medicare over $1.1 trillion, and Medicaid around $600 billion. These three programs, together with interest payments, already account for over 70 percent of the federal budget. Discretionary spending—both for defense and civilian programs—is under increasing pressure in this context. The One Big Beautiful Bill Act has further exacerbated the situation by increasing deficits by $3.4 trillion over ten years, which could rise to over $5.5 trillion if temporary measures are extended.

In France, the debt ratio is 114 percent of GDP, with absolute debt reaching €3.35 trillion—the highest in the European Union. The budget deficit amounted to 5.8 percent of GDP in 2024 and is expected to reach 5.4 percent in 2025. The Lecornu government is targeting a deficit of 4.7 to 5.0 percent for 2026, but independent observers consider this too optimistic. Financing needs for 2026 amount to €305.7 billion, of which €175.8 billion will be used to refinance maturing debt. Gross new bond issuance is estimated at €310 billion.

Interest costs on French government debt reached approximately €67 billion in 2025, exceeding total military spending. Finance Minister Lombard warned that these costs could rise to €100 billion by 2028, which would be more than all government ministries spend combined. The yield on ten-year French government bonds is 3.49 percent, compared to approximately 2.2 percent for German Bunds. For the first time since the euro crisis, France is paying similar or even higher interest rates than Italy, whose debt-to-GDP ratio stands at 137.9 percent. This development reflects a fundamental reassessment of French credit risk by the markets.

The structure of French government spending reveals the challenges of consolidation. At 57 percent of GDP, government spending is among the highest in Europe. Social spending, particularly pensions and healthcare, accounts for a significant share. The suspension of pension reform will cost an additional €2.2 billion by 2027. The draft budget for 2026 presented by the Lecornu government proposes savings of €30 billion—significantly less than the €44 billion targeted by his predecessor, Bayrou. Some experts argue that savings of €100 billion would be necessary to truly stabilize the debt.

Rating developments reflect this fiscal reality. In the US, Moody's downgraded the country's credit rating from Aaa to Aa1 in May 2025, following Standard & Poor's' withdrawal of the AAA rating in 2011 and Fitch's subsequent downgrade in 2023. Scope's most recent downgrade to AA- in October 2025 underscores the accelerated loss of confidence. In France, Fitch downgraded the country's credit rating from AA- to A+ in September 2025, followed by Standard & Poor's in October, which also downgraded it from AA- to A+. While Moody's did not downgrade the rating itself in October 2025, it did lower the outlook from stable to negative. This puts France on par with Spain, Japan, Portugal, and China.

The financial markets' reaction to political instability was particularly pronounced in France. The fall of the government in September 2025 led to a sharp increase in risk premiums. The fact that French government bonds now have yields similar to those of Italian government bonds was unthinkable just a few years ago and signals a fundamental shift in risk perception. In the US, the government shutdown from October 2025 onwards led to a further acceleration of debt accumulation, as key fiscal decisions were blocked.

The economic growth dynamics offer little consolation. The US is projected to grow by approximately 2.0 to 2.8 percent in 2025, which appears robust but will not significantly reduce deficits. France is struggling with significantly weaker growth and a structural competitive weakness compared to Germany and other European partners. This weak growth makes consolidation considerably more difficult, as the debt ratio continues to rise, even with moderate deficits, while nominal GDP growth is low.

The current situation is thus characterized by a triad of high debt levels, structurally high deficits, and rising interest burdens, exacerbated by political dysfunction. Quantitative indicators consistently show that both countries are on a fiscally unsustainable path, with no discernible political consensus on the necessary corrective measures.

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Washington and Paris in the Mirror: Common Patterns with Divergent Starting Positions

A systematic comparison of the fiscal challenges in the United States and France reveals both structural similarities and fundamental differences in causes, manifestations, and solutions.

The United States enjoys fundamental advantages that France does not share. As the issuer of the global reserve currency, the US benefits from exceptional demand for US Treasury bonds. This exceptional privilege allows the US to borrow at lower interest rates than other countries with comparable debt ratios. The dollar accounts for approximately 60 percent of global foreign exchange reserves, creating a structural demand for US Treasuries that is largely independent of short-term fiscal concerns. This position gives the US significantly greater fiscal space. The depth and liquidity of the US bond markets—the largest in the world—means that even in times of significant fiscal stress, the absorption of large debt issuances is possible.

France, however, is limited in its monetary sovereignty as a member of the Eurozone. The European Central Bank sets monetary policy for the entire monetary union, meaning that France cannot reduce its real debt burden through inflation or currency devaluation. French government debt is effectively denominated in a currency over which the country has no direct control. This creates a dynamic more similar to that of emerging markets than to that of the United States. The 2010-2012 eurozone sovereign debt crisis impressively demonstrated how quickly refinancing crises can escalate in a monetary union when market confidence dwindles.

The demographic challenges manifest themselves differently in both countries. In the US, the central challenge is the financing of Social Security and Medicare for the aging baby boomer generation. The unfunded liabilities of these programs exceed $75 trillion over age 75. Critically, however, these liabilities are not legally binding and could theoretically be adjusted through legislative changes, although this would be extremely difficult politically. In France, the demographic challenge is built directly into the structure of the pension system, with a low retirement age and high benefit obligations. The suspension of Macron's pension reform in October 2025 means that this structural challenge remains unsolved.

The political economy of the inability to reform follows different logics in both countries. In the US, the central blockage is the extreme polarization between the parties. Republicans categorically oppose tax increases, while Democrats oppose substantial cuts to social programs. This mutual veto power leads to a stalemate in which only minimal incremental changes are possible. The repeated government shutdowns and debt ceiling crises illustrate this dysfunction. In France, the blockade is the result of a fragmentation of the party system into three irreconcilable camps, none of which has a majority. The extreme wings have veto power, but use it primarily destructively, without offering constructive alternatives.

The institutional frameworks differ considerably. The US has no constitutional debt brake and no binding fiscal rules at the federal level. The Budget Control Act of 2011 introduced spending limits, but these have been repeatedly breached or suspended. As an EU member, France is theoretically bound by the Maastricht criteria and the Stability and Growth Pact, which stipulate a deficit of no more than three percent of GDP and a debt-to-GDP ratio of no more than 60 percent. In practice, however, these rules have had little disciplinary effect, as enforcement mechanisms are weak and political considerations often dominate over technical criteria.

Market discipline is at work in both countries, but with different intensity and time horizons. France is currently experiencing a significant increase in risk premiums, with yields approaching Italian levels. This market reaction occurred quickly after the political crisis in September 2025. In the US, however, interest rates remain relatively moderate, albeit rising, despite the massive debt. The yield on ten-year US Treasuries is around 4.5 percent, which is not exceptionally high by historical standards. The US reserve currency position significantly dampens market discipline but also creates the risk of an abrupt correction if confidence wanes.

The magnitude of the necessary adjustments varies. For the United States, the Congressional Budget Office estimates that stabilizing the debt-to-GDP ratio at current levels over the next decade would require savings or revenue increases of approximately $6.7 trillion. A return to the historical average debt-to-GDP ratio of 80 percent would require approximately $15 trillion in adjustments. Experts estimate that France would need savings of €100 billion to sustainably stabilize its debt, while the current government is targeting only €30 billion. Relative to economic output, the necessary adjustments in both countries are of a similar magnitude—approximately 8 to 10 percent of spending over several years.

The time frames for adjustments also differ. Economists warn that the US has about 20 years to take corrective measures before debt dynamics become uncontrollable. This assumes, however, that markets continue to believe that timely corrections will be made. In France, the time frame is significantly narrower, as the country, as a member of the Eurozone, is more vulnerable to crises of confidence and already pays substantial risk premiums. The International Monetary Fund has warned that France's debt-to-GDP ratio could rise to 128 percent by 2030 if no substantial reforms are implemented.

The role of central banks differs fundamentally. The Federal Reserve can theoretically purchase US Treasury bonds to dampen interest rate increases, although this raises concerns about its independence and carries inflation risks. The ECB has created an explicit tool, the Transmission Protection Instrument, to limit yield spreads between eurozone countries. However, its application is subject to conditions, including compliance with EU fiscal rules. In the case of France, the ECB could intervene if there is a risk of contagion to other eurozone countries, but would likely hesitate to intervene in purely French fiscal problems.

A crucial difference lies in their reform history. France has repeatedly attempted to implement structural reforms—pension reforms, labor market reforms, privatizations—in recent decades, but these reforms have regularly failed due to social resistance or have been severely watered down. The United States, on the other hand, has not implemented any substantial fiscal reforms since the Clinton years. The 2017 tax reform and the One Big Beautiful Bill Act of 2025 actually exacerbated the situation. Both countries thus share a fundamental inability to reform, rooted in different political dynamics but leading to similar results.

Between repression and catastrophe: The multiple dimensions of systemic vulnerability

The risks associated with the current debt dynamics in the US and France go far beyond immediate fiscal challenges and touch on fundamental issues of economic stability, social cohesion, and systemic resilience.

The central economic risk is the danger of a self-reinforcing debt spiral. If interest costs rise faster than nominal GDP growth, the debt-to-GDP ratio will continue to rise, even with balanced primary balances. The United States is approaching this critical point. With interest costs exceeding one trillion dollars annually and a structural primary deficit of several hundred billion dollars, the dynamics are already worrying. The Congressional Budget Office projects that, without corrections, the debt-to-GDP ratio could reach 175 percent by 2054. Some analyses warn that with a debt-to-GDP ratio exceeding 200 percent, sustainability will no longer be assured, even for the United States.

For France, the situation is more acute. The International Monetary Fund warns of a fiscal-financial vicious circle in which concerns about public finances could spill over into the banking sector and trigger a self-reinforcing crisis. The European sovereign debt crisis of 2010-2012 demonstrated this mechanism: Rising government bond yields weakened banks that held large amounts of government bonds, which in turn burdened the states that had to support their banks. French banks hold significant amounts of French government bonds, making this contagion risk real.

The crowding-out risk is already visible. Rising government debt crowds out private investment as government borrowing competes with private investors for limited savings. The Congressional Budget Office estimates that projected debt levels could reduce the US's long-term GDP by about one-third, equivalent to a loss of income of $14,500 per person per year. For France, the high interest burden means fewer funds are available for productive investments in infrastructure, education, or innovation, further weakening structural competitiveness.

Inflation risks are complex and controversial. High debt per se does not automatically lead to inflation as long as central banks remain independent and pursue a strict price stability policy. However, as debt grows, political pressure on central banks to use monetary policy to support government financing increases—a phenomenon known as fiscal dominance. If markets begin to believe that central banks will abandon their inflation target in order to reduce the debt burden, inflation expectations can dissipate and trigger an actual inflationary spiral. The repeated attacks on the independence of the Federal Reserve by political actors illustrate this danger.

The social risks are significant. Substantial fiscal adjustments—whether through spending cuts or tax increases—have distributive consequences that can exacerbate social tensions. The European austerity programs after 2010 led to massive social protests, rising unemployment, and the rise of populist movements. In France, the social willingness to make sacrifices for fiscal consolidation has already been exhausted, as the Yellow Vest protests of 2018-2019 and the protests against the 2023 pension reform demonstrated. In the US, significant cuts to Social Security or Medicare would face massive resistance, as millions of people have built their retirement provision on them.

The political risks include the further erosion of democratic institutions. Repeated fiscal crises and government shutdowns undermine citizens' confidence in the functioning of democratic systems. In France, serial instability—five prime ministers in one year—has fundamentally shaken confidence in the Fifth Republic. The inability to fulfill basic governance tasks such as passing a budget delegitimizes the political system and creates space for anti-democratic alternatives.

Systemic financial stability risks are particularly worrying. The International Monetary Fund warned in October 2025 of rising risks of a disorderly market correction. The combination of high asset valuations, low risk premiums despite high risks, and growing geopolitical tensions creates the conditions for a sudden loss of confidence. If markets begin to believe that debt is unsustainable, an abrupt rise in interest rates could occur, triggering a refinancing crisis. Over 20 percent of US debt must be refinanced in 2025, which would lead to massively rising interest costs in the event of an interest rate shock.

Contagion risks between countries are real. A downgrade of French bonds could spread to other highly indebted eurozone countries such as Italy or Spain. A US debt crisis would shake global financial markets, as US Treasuries act as a risk-free anchor of the global financial system. Research on the European sovereign debt crisis shows that rating downgrades can have significant spillover effects on other countries, even if they are not directly affected.

Intergenerational equity issues are becoming increasingly acute. The accumulation of debt to finance current consumption shifts burdens onto future generations who neither participated in nor benefit from the decisions. The unfunded liabilities of Social Security and Medicare in the US – over $75 trillion – mean that either future benefits will have to be drastically cut or future taxes will have to be massively increased. In France, the inability to reform the pension system means that either future retirees will receive lower benefits or future workers will have to pay higher contributions.

An underestimated risk is the danger of policy rigidity. High debt burdens and rising interest costs reduce the fiscal scope for countercyclical policy in future crises. If the US or France fall into a deep recession, the ability to respond with fiscal stimulus will be significantly limited. This could lead to more severe and longer recessions. The COVID-19 pandemic demonstrated the importance of fiscal flexibility in crises. Future pandemics, financial crises, or geopolitical shocks could hit countries that are already under maximum fiscal strain.

Controversial debates revolve around the pace and composition of necessary adjustments. Proponents of rapid consolidation argue that delays only magnify the necessary adjustments and increase the risk of a crisis. Opponents warn that austerity is counterproductive in economically weak times and can even increase the debt ratio by reducing growth. The empirical literature shows that fiscal multipliers—the extent to which GDP declines due to spending cuts—are higher in recessions and low interest rates than in boom periods. This implies that consolidation has a procyclical effect and timing is crucial. Resolving this dilemma requires a careful balance between credibility and protecting growth, which is politically difficult to achieve.

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Between gradual decline and abrupt crisis: Divergent future paths for indebted democracies

Projecting possible development paths for the United States and France must consider both gradual trends and potential disruptions. The spectrum of plausible scenarios ranges from a slow but controlled adjustment to acute financial crises with systemic repercussions.

The optimistic scenario of successful fiscal consolidation seems unlikely under current conditions, but it is not impossible. For the US, this would require a political compromise in which both parties make substantial concessions—Republicans would accept revenue increases, Democrats would accept reforms to the entitlement programs. Historical precedents, such as the Clinton consolidation of the 1990s, show that this is possible, albeit under considerably more favorable conditions—strong economic growth, the post-Cold War peace dividend, and the nascent technology boom. A modern version could involve a combination of closing tax loopholes, modest tax increases on top earners, gradual increases in the retirement age, and efficiency improvements in the healthcare system.

For France, successful consolidation would require a grand coalition willing to push through unpopular reforms against the resistance of extremists. This could include raising the retirement age, public sector reforms, deregulating labor markets, and modernizing the tax system. The model could be the successful reforms in Germany under the red-green Schröder government in the early 2000s, which were painful but restored Germany's competitiveness. The probability of this scenario is low, but not zero. A catalyst could be an acute crisis that forces a consensus on the need for reforms.

The most likely scenario is a continuation of the current pattern—the muddle-through scenario of gradual decline. In the US, this would mean deficits remaining at six to eight percent of GDP, the debt-to-GDP ratio gradually rising to 140 to 150 percent by 2035, and interest costs consuming a growing share of the budget. Periodic debt-ceiling crises and government shutdowns would continue to cause turmoil but not trigger a fundamental correction. The reserve currency position would persist but gradually erode as other countries—China, Europe—attempt to develop alternatives to the dollar. This scenario is not a stable equilibrium, but rather a gradual decline that is ultimately unsustainable but could persist for decades.

For France, the muddle-through scenario would mean successive minority governments that pass minimal budgets but fail to implement structural reforms. The debt ratio would rise to 120 to 130 percent, risk premiums would remain elevated, and economic growth would lag behind other EU countries. The ECB would prevent a complete market collapse through flexible application of the Transmission Protection Instrument, but would not solve the structural problems. This scenario would gradually lower French living standards and weaken the country's position within the EU.

The pessimistic scenario of an acute financial crisis is possible for both countries, albeit with different trigger mechanisms. For the US, a catalyst could be a debt ceiling crisis, in which a technical default actually occurs, fundamentally undermining confidence in US Treasuries. Alternatively, an external shock—a deep recession, a geopolitical crisis, a collapse of the dollar as a reserve currency—could destabilize debt dynamics. Economists warn that if confidence in the US's ability or willingness to service its debt were lost, interest rates would rise rapidly, potentially triggering a refinancing crisis. With more than 20 percent of the debt requiring annual refinancing, an interest rate increase of two to three percentage points would increase annual interest costs by hundreds of billions of dollars.

For France, the crisis scenario is more likely and resembles the Greek or Italian experience during the euro crisis. A trigger could be another government collapse, convincing markets that France is incapable of reform. Rising yield spreads relative to Germany would increase financing pressures, which in turn would require harsher austerity measures that are politically unfeasible. Contagion to the banking sector—French banks hold significant amounts of French government bonds—could trigger a fiscal-financial vicious circle. The ECB would likely intervene, but under strict conditions that would require painful reforms. The result would be similar to the Greek bailout programs: massive austerity, deep recession, and social unrest.

Technological and regulatory disruptions could significantly alter developments. The introduction of central bank digital currencies could fundamentally change monetary policy and create new opportunities for government financing—or risks of increased fiscal dominance. Climate change and the associated fiscal costs—both for adaptation and mitigation—will exacerbate fiscal challenges. Demographic change will accelerate, particularly in France, where the aging population will further strain pension systems.

Geopolitical disruptions pose significant risks. An escalation of trade tensions between the US and China could dampen global growth and worsen the fiscal situation. A major conflict—for example, over Taiwan—would mean massive defense spending and, at the same time, disrupt global supply chains. For Europe, an escalation of the Ukraine conflict or new security threats would require significant additional defense spending, which would clash with already strained budgets.

The radical scenario of debt restructuring or partial default is virtually unthinkable for the United States, but cannot be completely ruled out. Historically, even developed countries have occasionally restructured their debts – Great Britain after the Napoleonic Wars, the United States in the 1930s through gold devaluation. A modern variant could be a forced conversion of bonds to lower interest rates or longer maturities. For France, restructuring in the context of the Eurozone is extremely difficult, as it would destabilize the monetary union. However, the Greek experience in 2012 – a partial default with a 50 percent haircut for private creditors – shows that restructuring is possible even in the Eurozone, albeit with massive economic and social costs.

An often overlooked scenario is the slow monetization of debt through persistently high inflation. If inflation rates remain at four to five percent for several years while nominal interest rates rise only moderately, this would significantly reduce the real debt burden. This would be a form of financial repression – savers and bondholders lose real value while the government benefits. Historically, many countries – including the US after World War II and the UK in the 1970s – have partially reduced high levels of debt through inflation. However, this requires central banks to relax their inflation targets, which would create fundamental credibility problems.

The time frames for different scenarios vary considerably. Experts believe the US still has approximately one to two decades of room for adjustment before the dynamics become uncontrollable. However, this only applies if markets maintain confidence. An abrupt loss of confidence could drastically shorten this time frame. For France, the time frame is significantly shorter—possibly only a few years before an acute crisis occurs if substantial reforms are not implemented.

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Imperatives for action in a fiscally exhausted world

The analysis of the parallel debt crises in the United States and France reveals fundamental shifts in the global financial architecture and the sustainability of Western democracies. The downgrades by all major rating agencies not only mark technical adjustments in credit ratings, but also reflect a profound loss of confidence in these countries' ability to address their fiscal challenges.

The key findings can be summarized in several dimensions. First, the crisis goes far beyond the mere level of debt. While the United States, with a debt-to-GDP ratio of 124 percent, and France, with 114 percent, are both significantly indebted, these figures are not unprecedented—Japan functions with a debt-to-GDP ratio of over 250 percent. The crucial difference lies in the combination of high debt, structurally high deficits, rising interest burdens, and, above all, the political inability to implement corrections. The rating agencies have explicitly cited the erosion of governance standards, the weakening of institutional checks and balances, and increasing polarization as key reasons for their downgrades.

Second, the drivers of debt dynamics are self-reinforcing. Rising debt leads to higher interest burdens, which in turn increase deficits and require further borrowing. The US paid over $1 trillion in interest in 2025—more than for defense or Medicare—and these costs will rise to $1.8 trillion annually by 2035. In France, interest costs already exceed total military spending and could rise to €100 billion by 2028—more than all government ministries spend combined. This interest burden crowds out productive spending and reduces fiscal flexibility for future investments or countercyclical policies.

Third, demographic challenges are massively underrepresented in official debt statistics. Unfunded Social Security and Medicare liabilities in the US exceed $75 trillion. In France, a pension system with an entry age of 62—compared to 67 in Germany—imposes structurally higher burdens that can only be addressed through fundamental reforms. The suspension of Macron's pension reform illustrates how short-term political calculations dominate over long-term fiscal needs.

Fourth, the systemic risks are significant and globally interconnected. A US debt crisis would shake global financial markets, as US Treasuries act as the system's risk-free anchor. A French crisis could have contagion effects on other highly indebted eurozone countries and endanger the stability of the monetary union. The International Monetary Fund explicitly warns of increasing risks of a disorderly market correction and a fiscal-financial vicious circle.

The strategic implications for various stakeholders are far-reaching. For policymakers in the US, the situation requires a bipartisan compromise that encompasses both revenue increases and spending discipline. This could include a combination of closing tax loopholes, modest tax increases, gradual adjustments to Social Security and Medicare, and strict spending limits. The creation of an independent fiscal commission with far-reaching powers—similar to the Simpson-Bowles recommendations of 2010—could help overcome the political deadlock. Crucially, reforms must be implemented gradually and with long lead times to avoid abrupt shocks and allow for adjustments.

For France, the situation requires a grand coalition willing to push through unpopular reforms against the resistance of extremists. This should resume pension reform while negotiating a more comprehensive social contract that fairly distributes the burden. Labor market reforms, reducing bureaucracy, and modernizing the public sector should be combined with investments in education and innovation to strengthen competitiveness. Restoring fiscal credibility with the markets is critical to reduce risk premiums and avoid contagion effects.

For the European Union, the French crisis requires a reassessment of fiscal governance mechanisms. The existing rules – a deficit limit of 3 percent and a debt-to-GDP ratio of 60 percent – ​​have clearly not worked. A reform could include stricter enforcement mechanisms, automatic sanctions for violations, and, at the same time, more flexibility for productive investment. The role of the ECB and the Transmission Protection Instrument must be clarified – when and under what conditions the ECB will intervene, and what fiscal conditions will be imposed.

For investors, these developments imply a reassessment of the risk of government bonds considered safe. The days when US Treasuries and French OATs were considered virtually risk-free are over. Diversification across currencies and regions is becoming more important. Investors should actively assess fiscal sustainability and not blindly rely on implicit guarantees. The risk of abrupt market revaluations has increased, which can lead to sudden volatility and losses.

For multilateral institutions like the IMF, the situation implies the need to act preventively rather than reactively. Developing early warning systems for fiscal crises, providing technical assistance for fiscal reforms, and preparing for possible bailout scenarios are essential. The IMF should also advance the debate on reforming the global financial architecture, including mechanisms for orderly sovereign debt restructuring.

The long-term importance of this issue can hardly be overestimated. The ability of Western democracies to address their fiscal challenges is fundamental to their global position and domestic stability. Failure to do so would not only entail economic costs but also call into question the model of liberal democracy. Authoritarian systems like China would interpret this as proof of the superiority of their model. The coming years will show whether democratic systems are capable of solving long-term structural problems or whether they remain trapped by short-term political calculations.

A final assessment must be sober. Both countries are on fiscally unsustainable paths. The likelihood of voluntary, timely, and sufficient corrections is low. The most likely scenario is a gradual decline, punctuated by periodic crises, each forcing incremental adjustments without addressing the fundamental problem. The alternative—a major, visionary reform effort combining fiscal sustainability with social justice and economic dynamism—would require exceptional political leadership and social consensus. Given the current political fragmentation, this seems utopian. The rating downgrades are thus not just warning signals, but harbingers of a slow-burning crisis that will take decades to resolve—if it is achieved at all.

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